Down with this sort of thing

That those who err should be fined is entirely acceptable to us. But that the fines go to those who decide both upon the erring and the size of the fine? No, that’s a system pregnant with problems:

The proceeds of the £14.4 million fine imposed on KPMG last week for forging documents in connection with its audit of the collapsed construction group Carillion is to go to the trade body for accountants, with none of the money going to taxpayers or other creditors.

The Institute of Chartered Accountants in England and Wales (ICAEW) is set to receive the entire proceeds of the fine in another example, critics say, of it profiting from the misconduct of members while victims receive nothing.

The body, whose stated aim is to maintain professional and ethical standards, will have received at least £49.4 million of fines in recent years once it banks the Carillon-related penalty, under a controversial system known as the accountancy scheme.

Slippery slope arguments are logical fallacies unless that downward slide is a necessary outcome of those first steps. The incentives here are such that this is not a fallacy but a prediction.

We don’t allow the judge to partake of the fines in criminal court, nor are juries compensated from sums levied upon guilty verdicts. We even have a phrase containing the folk wisdom of not allowing such to be so - being judge and jury is a synonym for an unfair outcome.

Those who decide upon error, decide what the fine should be for error, collect the fines for having identified and quantified error, the incentives are indeed the same. Leaving the system as it is will inevitably lead to the abhorrence of the American system of near random confiscation of cash and assets by local police forces and the rest. Where the confiscee has to prove legal ownership of what is confiscated, reversing that burden of proof. Not for any reason other than that when the incentives are set that way then that’s what institutions will do. Collect the cash and dare those in their sway to come get it.

Fines that go into the general Treasury pot, perhaps. Fines that go to those financially abused, possibly. Fines that go into the coffers of those who decide whether there should be a fine, and how much if there should?

No, gerroutovit, do these people know nothing of human behaviour and incentives?

What horrors! How could this be?

The Guardian runs a piece from a civil servant. In which we are told of the horrors to come:

The omens aren’t good: we woke up on Saturday to a fawning interview in the Daily Mail, which confirmed Johnson’s incendiary plans to fix the cost of living crisis by cutting civil service numbers by a fifth, down to levels last seen in 2016.

At which point we do have a question. Was the country notably undergoverned in 2016? We can’t say we particularly noted that it was ourselves but that is the important question isn’t it? Or perhaps this one becomes even more so:

On my own patch, attempting to cut 20% of the workforce without a monumental and carefully designed change management programme would be a cluster bourach. Working from home accelerated the rollout of a lot of collaborative tools, and dealing with both Brexit and the pandemic has given us a lot of experience in working across silos to get things done. The minister I work for happens to be an actual human being, but my department is already struggling with its workload even after many of those efficiencies – what management wonks insist on calling “low-hanging fruit” – have already been found and priced in. There’s no question that cutting one in five of us would have a devastating impact on public services.

But if inefficiencies have been extracted, new tools - which presumably increase productivity - have been implemented, then don’t we require fewer civil servants than we did in order to gain the same amount of governance? That is what increased productivity means, after all. Gaining the same output from less human labour, or more output from the same input.

We do have some advice though. Cutting civil service numbers isn’t in fact the aim. Cutting what the civil service - government as a whole - tries to do is. Yes, there’s a certain irreducible minimum necessary to allow civil society - markedly different from the civil service - to work. But the proper task of a government is to slice, pare and surgically remove from its orbit those things that don’t need to be done by government.

Something which would make a 20% rollback in civil service numbers look very marginal indeed. We can but hope….

An example of 58 economists not being economists

There’s an open letter - which so far at least we can find no evidence of someone publishing - going around from 58 economists. Stating that the 58 aren’t being economists:

A group of 58 leading economists and politicians, including the former business minister Vince Cable, has written to the chancellor to say that scaling back City regulation will put the UK at risk of another financial crash.

The open letter, which has also been signed by the former Greek finance minister Yanis Varoufakis and Columbia University professor Adam Tooze, was sent in reaction to the Queen’s speech, which outlined Rishi Sunak’s plans to “cut red tape” through a financial services and markets bill.

Adam Tooze in an historian, Varoufakis and Cable are clearly politicians these days but still. It is indeed possible that bad regulation, which can include the idea of not enough regulation, could increase the chances of another crash.

The group of 58 economists, including a Nobel Prize winner and former business minister Vince Cable, said making competitiveness an objective could turn regulators into cheerleaders for banks and lead to poor policymaking.

The NL is Joe Stiglitz which doesn’t help us much in evaluating this - the unkind might suggest he’d lend his name to a note for the milkman.

But this is all evidence that the 58 aren’t being economists. For they’re stating that even to consider competitiveness is to be in error. Which is a breach of that most basic lesson of economics - there are no solutions, there are only trade offs.

Yes, of course we desire a financial system unlikely to crash. But only up to the point where the cost of it not crashing is no more than the cost of it crashing. Within that envelope we desire that it be as competitive as possible - because competitive is a synonym for productive and we really do insist that we want all portions of the economy to be productive. Preferably continuing to be more productive over time as that, in itself, is a synonym for growth - us all getting richer.

To insist that regulation should not consider things in the round, should not grasp that the task is to balance the trade offs - to insist that competitiveness not even be considered - is to be non-economic. Which is an odd thing for 58 economists to go around parading really.

Ah, we’ve just found that Richard Murphy was one of the signatories. Well, that just seals it then, clearly abject nonsense. No need to note those other such indicators, Ann Pettifor, Miatta Fahnbulleh, Nick Shaxson then.

Under daily attack from the Department of Health

The proposed ban on buy-one-get-one-free offers on foods considered to be unhealthy has been postponed for a year, with the cost of living crisis cited as the reason. Another part of the reason might have been the growing hostility on the part of several Conservative MPs to a stream of new laws from the Department of Health and Social Care designed to make it more expensive or difficult for people to do things the Department does not want them to do. They are usually things that people want to do. If they did not want to do them, there would be no need to ban them or make them costlier.

There seems to be a mindset in the Department of Health that they must attack popular tastes in food and drink, and use the power of the law to enforce change. They want people, but especially children, made to consume less sugar, salt and fats. This means controlling the advertising of treats enjoyed by children. They target obesity with proposed limits on calories. They seem to think we should all be eating steamed fish and cucumber, and then only in controlled quantities.

They “negotiate voluntary agreements” with the food industry to lower the sugar content of food and its calorie content. The word “voluntary” is used alongside the threat of legal action in the event of non-compliance.

It might be minimum unit alcohol pricing that leads poorer people to seek cheaper, stronger drinks. It might be calorie counts on restaurant menus that drive people concerned about their weight and shape into eating disorders. The point about these relentless “better health” laws is that some of them have unanticipated knock-on effects that lead to unplanned and undesired consequences.

In an ideal world, the Department of Health should concentrate its resources on being ready and able to deal with pandemics, and with clearing health backlogs and delays. Instead it squanders time and effort in trying to micromanage people’s diet, and on preparing and promoting laws that make decisions which most people would prefer to make for themselves. Since the Department is not very good at doing the things it should be doing, there is no reason to suppose that it would be any better at doing those it shouldn’t be doing.

It seems to be the less well-off who are most affected by all this. Sweets were once thought of as unnecessary luxuries that it was justified to ration and to tax, but in the real world it is more likely that poorer people will eat sweets to liven up what would otherwise be a fairly dull diet. As Orwell observed in ‘The Road to Wigan Pier,’ “The less money you have, the less inclined you feel to spend it on wholesome food.”

It might be reasonable to promote information about the possible consequences of eating certain foods, because that would enable people to make informed choices. But to make those choices for them is to step outside the line that divides a free society from an unfree one.

The postponement of the proposed ban on certain food offers should be a permanent one, and the Department of Health should be reorganized so that those dreaming up and promoting their cascade of restrictions should be candidates for early retirement.

An energy windfall tax on exactly what now?

There are calls for a windfall tax on the “excess” profits being made by energy companies. This is, of course, ludicrous. Taxing supply at a time of dearth really is not the way to go about things.

However, there’s a subsidiary point to be made here. Which energy companies should be taxed given that all are making “excess” profits?

North Sea oilwells should be taxed more heavily and so should the production of natural gas. Energy companies are making record-breaking profits from the sale of hydrocarbons that lie in the deep water that surrounds Britain and that should shame the industry when the people paying the highest price are the poorest in society.

It should shame them into willingly parting with some of the gains, especially when the price of oil and gas is dictated by global markets that are driven at the moment largely by the conflict in Ukraine. These are not super-profits that can be attributed to the ingenuity of their staff or foresight of company directors.

Every single part of that analysis can be applied to - just as an example - the offshore wind industry. We can even check this. Varied new such fields gain access to guaranteed prices from contract for difference arrangements. Those new fields are not, as yet, signing up to those CfDs because the open market price is higher than they would gain from those guarantees.

It’s logically possible to stand where we do. The entire idea is absurd. We positively lust after people attempting to make those “excess” profits by developing energy sources which can provide the juice we desire when other sources fail us. If the profits arrive then they’ve done us a service by spending their capital on covering that lack of energy from those other sources. If the dearth does not arrive then they don’t and, ah well, so, that’s capitalism, the profits don’t arrive.

It’s also possible to allow the green eyed goddess to determine behaviour and demand that swingeing taxes be applied to anyone who has the temerity to make a decent profit. But the point we think it important to note is that if society is to do the second then it is indeed everyone making those stonking profits from energy supply that should be so taxed. Yes, that includes the political favourites of wind, solar and so on. If profits are Bad, M’Kay, then it is profits that are Bad, M’Kay?

Windfall taxes are an idiot idea but such on the energy sector that don’t in fact cover the energy sector would be vile.

If only George Monbiot bothered to read the climate change science

This applies to many more we’re afraid:

His is the latest in a line of books by professional optimists – Gates, Steven Pinker, Matt Ridley – who have failed to grasp the nature of either Earth systems or the political economy that bears upon them. These men are not climate deniers; they are politics deniers. They appear to believe that the transformations necessary to prevent systemic collapse can happen without political pressure or political change. Understandably, the media loves them. Nothing fundamental needs to change, we can sit and wait for technological and demographic shifts and everything will work out in the end. A simple story with a happy ending, telling power what it wants to hear, this is the Disney version of environmental science.

Therefore, Monbiot goes on, we need to have a radical political change in order to beat climate change.

Except that’s not what the science says, not at all. In fact, it’s built into all of the models and assumptions used by the IPCC (let’s stick with the idea that that’s the real science here) that technological and demographic shifts will solve the problem. Or at least, can potentially do so.

Going back to the SRES, the base economic models which underpin the entire sector. The A2 (the model Stern used) and B2 models, assuming a regionalised and fragmented global economy, do worse by every measure. More and poorer people with more and worse climate change. So, let’s not do that then, let’s stick with globalisation which does better - the A1 and B1 models. B1 is largely a global social democracy and this again does worse than A1, which is, roughly speaking, globalised free market capitalism - neoliberalism that is. Worse in the sense that the people are poorer at the end of it all.

So, assuming that it’s possible to beat climate change within the A1 series of scenarios that’s the one we should prefer.

As it happens, A1FI is similar to that RCP 8.5 (effectively, it’s the same model) that would all three of be a disaster, is described as business as usual and isn’t going to happen. A1T is that globalised capitalism powered by nuclear and renewables with unconventional oil and gas (ie fracking) as an intermediate stage. Which does indeed solve global warming and does so as well as any of the other models studied.

So, to the extent that we can even try to influence the global economy that’s the one we should plump for. Solving climate change while leaving humanity as best off as it can be while doing so.

If we leave these issues to “the market” and other supposedly automatic processes, we can see what will happen.

Well, maybe, that might happen. Given the way that the IPCC set up those SRES models that is a possible outcome. They are very clear that all of the scenarios are equally possible.

But we’ve decided that we would like to at least attempt to influence that global economy. Which gives us Nordhaus, Stern and 93% of polled economists. In order to maximise that opportunity of taking the A1T path we desire a carbon tax at the social cost of carbon. At which point we’re done. We’ve stuck our oar into the market incentives the once, been as efficient as it is possible to be and thereby flipped the global economy over to that most desirable outcome. Solving climate change while leaving humanity as well off as it is possible to be having done so.

Globalised free market capitalism plus a carbon tax. That is what the science actually says.

Now, it’s possible to disagree with all of the science that underpins the IPCC process, most certainly it is. But if one does so then none of the other conclusions to be drawn from that process are valid either, are they? Can’t go around insisting that climate change is a problem that must be solved if you’re arguing about the evidence and logic that leads to the conclusion that climate change is a problem that must be solved.

This is one of the things that so amazes us about the entire climate change shouting match. The very people who demand that we all act according to the science seem to be the most insistent upon ignoring that science.

Perhaps they’re just ignorant of it?

In praise of crypto markets

We don’t really even pretend to understand the crypto markets. Apparently something called the Luna/Terra stablecoin has gone kablooie. As far as we do understand it if the Terra became worth anything less than $1 USD then Luna’s were issued to the value of $1 USD which could then be swapped for a Terra. We’re really not sure if we’ve got that right but given that Luna is now worth $0 USD this would require eiether an infinite issuance or an infinite number to swap for a Terra at which point we think we’ll go for a quiet lie down.

Except for the part where we praise this system. Not the specific Luna/Terra arrangement, but the system of free markets that allows the experiment. What it is possible to do changes as technology advances, what people desire to have done changes with taste, fashion and quite possibly the direction of the wind.

It is precisely free markets - those with open entry access - which allow the experimentation to see which of those things can be newly done meet some human desire or need. Terra/Luna seem to have shown that they don’t and all in under three years from launch. Which we think is a pretty good result actually - doesn’t work, it’s gone, Kablooie and Huzzah.

We would contrast this with government planning things. The law which prevents people building houses people would like to live in, where those people would like to live - The Town and Country Planning Act - was passed in 1947. As we’ve noted before we think that should also disappear, be blown up, proper Kablooie. But no such luck as yet.

It is entirely true that tens of thousands will have been financially damaged in that Terra/Luna adventure. Quite possibly fiscally ruined some goodly portion of them. And yet that free market both allowed the experiment and also closed it down when failure was obvious. The Town and Country Planning Act is screwing up the housing market of an entire country and has been for over 70 years.

If only government was as vicious in killing the errors as those free markets are…..

Prices really are information you know

No doubt all recall how we shouldn’t bother fracking in the UK. For if we did then the increased gas supply wouldn’t make any difference to the price. That being one of the more economically illiterate arguments that has been put forward.

Now it is true that if gas were perfectly transportable then an increase in supply wouldn’t affect the local price very much. But that very non-locality of the price drop from an increase in supply means that many more people would benefit. This simply must be true - pennies for hundreds of millions of people or pounds for millions, the total benefit will be the same even if the distribution is different.

It’s also true that if there is local extraction then it is our Treasury that gains the resource rents, not those of Norway, Holland or Russia. Which seems like a nice thing to have really. Even if there is no change in prices that we’ve got a lower tax bill on everything else sounds good.

But it’s not in fact true that gas is perfectly transportable. For if it were - changes in local supply immediately dissipating their price effect across the whole market - then this would not be true:

Wholesale gas prices for next-day delivery in Britain have tumbled to pre-energy crisis lows that are a fifth of the price in Europe because of an unprecedented glut of liquefied natural gas.

Demand for gas in Britain has dropped with warmer weather and there is not enough pipeline capacity to transport all the gas that has arrived in the country to mainland Europe where it is needed, analysts say.

There are local gas prices, we do not have a fully integrated European, let alone global, gas market. Local production will affect local prices therefore.

Fracking would reduce British natural gas prices.

Isn’t it interesting what we can learn from the information contained within prices?

Economics really isn't this difficult, no, really

Britain has indeed had a certain number of sterling crises in the past. It’s not going to have one now. We say that in absolute and full confidence:

By UK standards, what has happened in the past few weeks qualifies as a wobble rather than a full-blown crisis of the sort that forced sterling off the Gold Standard in 1931 or out of the European Exchange Rate Mechanism by speculators led by George Soros on Black Wednesday 30 years ago this year.

Nor was the sell-off as serious as that seen in 1976, the crisis that persuaded the then Labour government to ask for financial support from the International Monetary Fund. For the pound’s current weakness to become as legendary as 1931, 1976, 1992 or the postwar devaluations of 1949 and 1967, it would have to fall from today’s level of about $1.23 against the US dollar to parity, where £1 buys $1.

Yes, this is The Guardian so obviously the important economic points are going to be missed.

But in all of those previous instances the government - or the Bank of England, take your pick - was committed to trying to maintain a certain price for sterling. The crisis was always when the pressure became such that the price couldn’t be maintained.

Today we might well have some sort of idea what is a desirable exchange rate - or we might not. But we’ve no public commitment to one and thus it cannot be that pressure will break it. Therefore we’re not going to have a sterling crisis.

After all, a fixed price can only be broken if there is a fixed price that someone is trying to maintain.

The Guardian lists 5 different sterling crises there. All of them reliant upon the government (or BoE) trying to insist that prices were different from what reality said they were. In the absence of government trying to defy reality there are no crises. Sadly, this being The Guardian not only have they failed to note that they also then go on to insist that government should fix the price of labour, of energy, of whatever else they think would be better if reality were kept at bay.

Sigh. For in any battle between government prices and the real world it is that universe out there that wins, always.

An Accepted Code of Behaviour

The word “protocol” comes from Greek and means, amongst other things, “an accepted code of behaviour”. The question here is how long behaviour has to continue in Ireland before it can be regarded as “accepted”. In the dawn of the 20th century, my great-grandfather was deputy head of the Royal Irish Constabulary. Sinn Féin was founded in 1905 and won 73 of the Irish 105 seats at the 1918 general election. The loyalist Black and Tans were formed in response and the troubles which had begun in the 19th century continued until partition in 1922 created the border. Come Brexit, Dublin, backed by Brussels, announced that the border was unpoliceable, contrary to the Good Friday Agreement and would cause sectarian violence. Despite nearly 100 years of evidence to the contrary, the UK government foolishly agreed and tied itself into the knots we now call the protocol. 

My great-grandfather’s memoirs record that he got along pretty well with both Catholics and Protestants.  He was from the north himself.  Of course, he detested the violence and did his best to catch those responsible but the interesting point was that he blamed Whitehall for the troubles, not the Irish. Much the same could have been said of Cyprus in the 1950s. Whitehall had no understanding of local feelings.  

From the moment the Irish protocol was agreed in December 2020, it was clear that, from the UK’s point of view, it would not work.  Paperwork and controls would be excessive, legal product in one part of the UK would be illegal in another and trade would be distorted in that it would shift from Britain to the south of Ireland.  The protocol specifically makes this last issue a valid reason for renegotiating it. 

Of course, Dublin and the EU always knew this would happen. An EU official, Martin Selmayr, is reported to have said “Northern Ireland is the price to pay for Brexit,” but that is disputed.  There is no doubt however that Dublin was closer to Brussels than Belfast was to London.  And that is the nub of this blog: the UK government of the day always considers it knows best and there is no need to involve the locals.  Belfast barely took any part in the negotiations except on one occasion when they invited the Sinn Féin leader. Brilliant! They then spent two years of failing to renegotiate the protocol by endlessly repeating the same cycle. Whitehall threatens to tear up the protocol; Brussels and Washington say “no you cannot”.  Round and round we go and get nowhere. 

In fact, there is no need to tear up the protocol. It includes the rationale for amendment and the process for so doing.  Whitehall has, however, so misplayed its hand, and alienated the French, Germans and Americans in particular, that it will never succeed and should bow out.  The Dublin and Belfast governments have surprisingly good relationships and should be invited to come up with a joint solution.