If we could just say very well done here, no, vry well done indeed

The standard and long lasting critique of the British economy is that we don’t, collectively, invest enough. Even that amount we do invest is at least partially financed by foreigners - that’s why we have a capital account surplus and also a trade account deficit in the balance of payments - meaning that domestic savings must be lower than even the anaemic investment demand.

We also know that we gain less of anything we tax. Yes, of course, at least some government is necessary, therefore there will be taxation. But it is still true that the act of taxation itself means less of whatever is being taxed.

So, given the paucity of both savings and investment, the effects of taxation upon both savings and investment, what is the proposal for the economy?

Labour’s deputy leader has suggested that the party should raise taxes on savings and investments.

Err, yes, that’ll sort matters out, won’t it? Tax so as to have less of both those savings and investings that the country is already short of.

Very well done that politician there, vry well done indeed.

Dunkelflaute, DESNZ, and Departmental Questions

The new Department for Energy Security and Net Zero (DESNZ) is due to publish an energy strategy by the end of this month, according to oral evidence given to the Public Accounts Committee on 23rd March.

This responds to a ruling by the Hon. Mr Justice Holgate on 18th July 2022 that the government had no 2050 energy plan and should produce one Pronto. He called, in effect, for a detailed roadmap showing how net zero will be achieved along with targets and outcomes published annually.

The reason for the delay, according to the DESNZ Permanent Secretary, is that they have so many mini-strategies and thousands of simulations. Q23: “We actually have a number of plans already to help us to achieve that.” Followed by Q24: “The Department runs thousands of simulations…” In other words, DESNZ is unable to see the wood for the trees.

The wood, as our written evidence to the PAC pointed out, is really quite simple. Due to weather variability i.e. “dunkelflaute” - a period of time in which little or no energy can be generated with wind and solar power - no amount of renewables will suffice. They will have to be backed up by nuclear, natural gas (plus carbon capture and storage – CCUS) and electricity imports from Norway and the continent, in turn offset by exports when the winds favour the UK. In other words, just four sources. DESNZ envisages three others: batteries, biomass and hydrogen. These, as our written evidence explains, are bunkum.

And how will total electricity demand be divided between the four sources? DESNZ expects that 2050 electricity demand would be less than double current levels: 580TWh compared with 300TWh now. A decarbonised 2050 power market implies that almost all UK energy will take the form of electricity. If 2050 total energy needs prove to be about the same as in 2020, electricity supply will have to increase by nearly seven times. The Chancellor’s budget forecast a 15% reduction due to energy efficiencies but that still means DESNZ is under forecasting by about three times…

DESNZ’s oral evidence did not disclose the split between the four sources but for renewables they talked about capacities, not delivery. Wind seldom exceeds 50% of its nominal capacity. Wind capacity in 2021 was 25.7 GW. Wind power only reached 50% of capacity for 2.3% of the time (205 hours). Equally importantly wind failed to meet 20% of demand for 58.8% of the year (5,154 hours).

For nuclear, the Permanent Secretary talked about “up to 24 GW” being added but only Sizewell C was specified (3.2GW). (Q41) The Nuclear Industry Association’s written evidence that 24 GW is an underestimate is surely correct. 56 GW seems more likely.

Nuclear will, in fact, need to move quickly to the SMRs the Chancellor highlighted in his budget but only had partial acknowledgement by the DESNZ team. We will need about 100 but we had no outline of how many suppliers would be considered, how many chosen or how many SMRs needed or timescale. Recognising the need and specifying how we will get there are very important as is also the case for CCUS but a government department preoccupied by “sophisticated modelling” appears to have has no time for simple commercial implementation.

The DESNZ team was reluctant to share with the MPs even the information that will be released next week. This is my final point. Delay and obfuscation are cloaks for incompetence. We need a SAGE-type team of top scientists and engineers openly to advise DESNZ and blow away the cobwebs. Such advice should be open to peer review. If DESNZ carries on fiddling while CO2 levels rise, we will not get to net zero this century.

Bibliography:

https://committees.parliament.uk/oralevidence/12875/pdf/

https://www.judiciary.uk/wp-content/uploads/2022/07/FoE-v-BEIS-judgment-180722.pdf

https://committees.parliament.uk/writtenevidence/119204/pdf/

https://www.bmreports.com/bmrs/?q=generation/fueltype

https://committeIbides.parliament.uk/writtenevidence/119201/pdf/

https://committees.parliament.uk/writtenevidence/119204/pdf/

Surprise! Incentives matter, even to upper middle class professionals

The most basic and fundamental thing you need to know about eonomics is that incentives matter. This is all that is required to understand this little snippet of news:

British patients face the shortest GP appointments and are least likely to see a doctor in person, an international study has found.

In most parts of the world doctors are paid when they see a patient. This may or may not mean that they then do something to solve said patient’s problem but that’s not what is being measured here. Rather, who gets to see a doctor is being taken as the measure of success because that is what is being measured - who does the doctor see?

All we require to understand this is that British GPs are not paid for seeing people. Instead they have their list and they receive an annual fee for everyone who is on that list - the capitation fee. In fact, the incentives in the British system of paying doctors are to maximise the number on the list and minimise the number of them who are actually seen. Which does, neatly, explain why the British find it so difficult to gain a doctor’s appointment, because British doctors are paid for not seeing patients.

Switch the payment system to that of other places and the performance of the system will be as that of other places. For, yes, incentives matter. Pay doctors for seeing patients and doctors will see patients. We can decry this as merely waving filthy lucre at them but given that we already stuff their mouths with gold we might as well get the incentives right as we do so.

The only useful argument against this idea is that we don’t in fact want doctors to see patients. We can imagine a bureaucracy dreaming of that as the perfect outcome but we think it more than a little odd as a goal of actual public policy.

The graphics that won a war

Forty years ago, on March 23rd 1983, President Ronald Reagan startled the world by unveiling the Strategic Defence Initiative (SDI). The plan was revolutionary in that it proposed a programme that would cultivate a defensive barrier, much of it in outer space, that would shield the US against enemy nuclear attack.

The previous doctrine had been Mutually Assured Destruction (MAD), to convince possible enemies that any attack would be met with a retaliation that would destroy them. The USA and the USSR trained nuclear missiles at each other from silos and submarines, and armed strategic bombers stood ready to launch if incoming enemy missiles were detected.

The new US policy was to use advanced technology to construct a nuclear shield to deflect and destroy enemy missiles before they could reach their targets. It was to include X-Ray lasers, neutral particle beam weapons, electromagnetic rail guns, kinetic kill vehicles and terminal phase defence to destroy warheads as they re-entered the atmosphere and before they could detonate. It was breath-taking in scope and alarmed the Left to the point of near hysteria. They described it as impossible science fiction, and dubbed it “Star Wars.”

The Soviets did not think so. When Gorbachev met Reagan at the Reykjavik summit in 1986, the top item on his agenda was that the US must abandon the SDI. He knew that the Soviets had neither the technology nor the resources to undertake, or to overcome, such a project.

Oleg Gordievsky, head of the KGB’s London station but secretly working for MI6, briefed Reagan not to concede on the SDI. He told the President that it would win the Cold War and that the USSR would fold if the US stood firm on it. The summit ended without agreement because the SDI was the one thing that Reagan would not budge on.

The US began initial work on key parts of the project, with graphics showing how it would develop and work. Larger than any technology gap was the graphics gap, with Soviet strategists appalled at depictions of what they would have to confront. In the event, the programme succeeded without needing to be implemented. As Gordievsky had predicted, the USSR folded three years after the failed Reykjavik summit. The iron curtain and the Berlin Wall came down, and the USA has won the Cold War.

A determined President, backed by conviction as well as technology and resources, had faced the enemy down and won. And graphics played no small part in that victory.

So we need the supermarket chains to invade the Global South then

From the latest IPCC report on climate change the Guardian plucks this policy necessity:

Finally, reducing food waste will be vital, as globally one-third of all food produced for human consumption is wasted. In poor countries in the global south, the lack of refrigeration is also a key factor in wasting food before it can be consumed, and is worth investment.

As the FAO constantly reminds us it’s not, in fact, rich world households wasting food by allowing it to rot in the refrigerator. It’s actually the vast quantity of food that rots in poor countries in the collection and distribution systems. That lack of refrigeration mentioned being only a part of it.

Yes, this is indeed something we both should and could do something about.

One way of modelling a supermarket is that it’s a logistics chain. The shop itself is only the front end - it’s managing the entire supply chain from the field that is really the economic activity being undertaken. Therefore the solution is obvious. The Global South should allow the global experts, the supermarket chains, to enter their economies. If we must really contribute to this, by “investment”, then we can subsidise their entry into those markets.

Of course, this isn’t what The Guardian actually desires but it is the solution to the identified problem. Such a pity they’ll be horrified when this is pointed out to them. This really is one of those problems that global capitalism and free markets will solve.

How gloriously rich AI will make us

Well, assuming that aritifical intelligence is going to add any value at all that is.

Last week, Eliezer Yudkowsky, co-founder of an AI lab, made a startling discovery: AI models can copy each other far more easily than anyone previously thought, and the larceny is almost impossible to stop.

“If you allow any sufficiently wide-ranging access to your AI model,” he explained, “you're giving away your business crown jewels to competitors that can then nearly clone your model without all the hard work you did.”

The result? “You no longer have a competitive moat,” he says, referencing industry jargon for a competitive advantage that’s hard to beat.

Assume that some new technology actually is going to add some value. There are two places that value add can go. Either to consumers in the consumer surplus - the amount we would be willing to pay but don’t have to - or to the capitalists in profits.

The defining point over which happens is how easy is it to copy that first innovation? If it’s difficult then that’s Warren Buffet’s moat against competition coming and eating your profits. If it’s easy then competition does eat all the profits and the value add ends up with consumers.

The easier AI is to copy then the more of the value will accrue to consumers - the easier it is to copy the richer it will make us and not the capitalists.

Which is nice, isn’t it? Also, it means we don’t need to tax the capitalists who make the AIs because we’ll already be doing that through the competition. Which is also nice - we leave them be to make us richer that is.

If it's good for you, it's good for me

The Adam Smith Institute enjoyed some successes in the Budget yesterday. With ‘full expensing’ at one point coined the ‘best policy you’ve never heard of’ by our Senior Fellow Sam Bowman. Now I’m not sure it deserves this moniker at all - as the Chancellor gave us ‘full expensing’, which means firms can write off (some) their investment expenditure.

Alongside Abolishing the Factory Tax, the ASI had another, more understated policy win. This has garnered less public buzz, but will bring about outsized value at the cost of a piece of low-hanging fruit: medicinal reciprocity with trusted countries.

The Chancellor told us he will implement Sir Patrick’s interim recommendations for Life Sciences reform. One policy recommendation concerns the Medicines and Healthcare products Regulatory Agency (MHRA) which will now explore: ‘partnerships with trusted international agencies [...] to provide simple, rapid approvals for medicines and technologies that have received their approval from 2024.’ (Spring Budget, 2023: 67). In short - adopting the best drug and medical device regulatory practices from around the world. 

Charter Cities CEO Mark Lutter wrote an ASI paper advocating for such a policy. This called for allowing the use of drugs and medical devices that have been approved by the regulatory agencies of other developed countries. This could include the Food and Drug Administration (FDA) of the USA, and Japan’s Pharmaceutical and Medical Devices Agency. If Japan or the US approve a drug, it will be automatically approved for prescription here in the UK.

Drug reform of this kind means that countries can streamline the process of getting new medications approved, saving time and resources, and lowering the transaction costs of bringing new potential life-saving drugs to market. That money once earmarked for burdensome regulatory processes, now becomes unlocked for direct life sciences research and development (one would hope). It could also incentivise further innovation, by encouraging collaboration between the pharmaceutical companies of each country within the reciprocity web.

It’s such an easy win that one can only wonder: why has it taken the UK so long post-Brexit to implement? This piece of low-hanging fruit has been hitting us in the face every time we walk into the Garden of Potential Policies for years until yesterday we finally decided to pick it off its branch! Why didn’t we do this pre-Brexit? Because we couldn’t.

Before Brexit (remember that time?), the UK’s membership to the European Union (EU) meant that we were a part of a centralised system for the approval and regulation of medical drugs through the European Medicines Agency (EMA). We were required to follow the EU's regulatory framework and could not unilaterally reciprocate drugs with countries outside the EU without adhering to the EMA's standards and processes.

Even outside of its own multiple-state-lined walls, the EU has its own set of agreements with third countries (like the US and Japan) for the mutual recognition of drug approvals and regulatory standards. These agreements are negotiated at the EU level, and individual member states, including the UK before Brexit, still did not have the authority to establish separate agreements with non-EU countries. This centralisation of regulatory processes within the EU was designed to maintain consistency and quality control for drug approvals across all member states, but could nevertheless prove sclerotic.

By recognizing each other's regulatory processes and sharing information, the UK can follow the lead of trusted international partners and expedite the availability of new treatments, promote innovation, and ultimately improve patient outcomes. As the world continues to face new healthcare challenges, the importance of international collaboration and reciprocity in the pharmaceutical industry cannot be understated.

That grand impossibility of planning the economy

An interesting comment here from the Office for Budget Responsibility:

In an interview with The Telegraph, Mr Miles conceded that the OBR's central forecasts published on Wednesday were “almost guaranteed to be wrong”, adding that the watchdog had faced accusations of being both “ridiculously optimistic” and a “bunch of pessimists”.

The problem here is not with the people - the Treasury. NIESR, the IFS, varied bank models and so on are all as bad - but really is in our stars. It is not possible to model something as complex as the economy to the sort of level of detail people are trying to.

This is of course Hayek but Hayek applied to macroeconomics rather than the details of microeconomic policy like trying to determine what the price of bananas should be.

It’s the implication of this fact that is so important. Given that the model is impossible then attempts at management by the model will not work either. The best that can be done is some vague and broadbrush idea - try not to collapse things, nor set off an inflationary spiral - and the rest of it has to be left to take care of itself.

That detailed demand management so beloved of Keynesians simply does not work. Not just for political reasons - those sunny days when deficits should be reduced never do seem to arrive - nor worries about the theoretical linkages of the models. But because we simply cannot produce a model reliable enough to allow us to make forecasts and thus tinker.

We’re actually rather left with the idea that macroeconomics as a management tool isn’t very useful. Which is fine by us of course. We’ve long said that if we get the nuts and bolts of incentives and price setting mechanisms - markets - right then the macroeconomy will be emergent from that. She’ll be right when she arrives cast in all her raiment too.

That is, it’s not so much don’t meddle as you’ve not got a clue what you’re doing so don’t meddle. Which, come to think of it it, is useful advice for so much of life, not just political control of the economy.

The Candle Makers are back

M. Bastiat and the Candle Makers are back in the news:

From lawsuits to IT hacks, the creative industries are deploying a range of tactics to protect their jobs and original work from automation

There are calls for changes to copyright in order to protect those jobs and incomes. Which is, from the societal point of view, entirely the wrong answer. For it is to fail to understand why we have copyright in the first place.

Innovation (which is covered by both patents and copyright) is difficult and therefore expensive to do. Once done it’s easy to copy. Therefore artistic works are, in an economic sense, public goods. The ease of copying means that they are non-rivalrous and non-excludable. We can all have a print of a Vetriani, a copy of Pratchett and hum along to a popular beat combo once that difficult work of creation has been done.

The public goods argument is that given this then less effort than we would like will be put into the original creation. Given how difficult it is to profit from having created less creation will happen. So, we deliberately construct these copyrights in order to make such things excludable and so enable artists to generate an income from the artifical scarcity.

There is no natural right here, this is a purely invented and for good enough reason attempt to solve the public goods problem.

Now we’ve the AIs able to copy out unlimited amounts of tosh. We have solved our supply problem. We do not need to protect the supplies of tosh in order for there to be supplies of it. We have solved the public goods problem not by placing restrictions upon supply but by entirely abolishing said restrictions upon supply.

Super. The public goods nature of the creation of what is a useful description of vast amounts of modern art, literature and so on - that tosh - is now solved. We can relax copyright therefore. Indeed, should. Restrictions which are past their sensibility date should be relaxed. Artists can go back to starving in their garrets and the rest of us have an unlimited amount of creativity to enjoy.

Protecting the jobs of artists was never and is not the point at all. Protecting the incentive to produce what we wish to consume was. Now that AI - as we’re being told is true by the very complaint we’re getting from the candle makers - automates and therefore makes free the creation of what we wish to consume then the correct response is to abolish copyright.

Fun how a proper appreciation of basic economics illuminate matters, no? Draws back the curtains on the correct policy response?

For the avoidance of doubt, this writer makes a living scribbling about financial markets. Exactly the area where such ‘bots and AIs have been making in roads - reporting company results and so on - this past decade. Yes, this is a welcome to my world argument.

Yes, of course productivity is flatlining

Just one tiny quote:

with productivity flatlining for 15 years

Vast amounts of deliberate policy are being deployed to insist that productivity flatlines. This being something that folk just aren’t getting - or being told.

This is not, by the way, some complaint about diversity officers who do nothing useful, council clipboard wielders who positively prevent anything from happening. These exist but we’re not on one of our dyspepsia kicks here, this is a simple matter of definitions and arithmetic.

Take the Green Party’s longstanding insistence:

“Figures from our Green MEPs show that investment in renewable energy would create far more jobs than nuclear power. These jobs would be far more secure in the future as they would come from many investment projects at many different scales, rather than the tiny number of huge deals involved in building new nuclear plants.

“Meeting our 2020 wind targets alone would create up to 130,000 jobs and the opportunities in solar power are massive, with more than 100,000 potential jobs installing solar panels across the UK. We are lagging behind our European neighbours already. In Germany there are 250,000 jobs in renewable energy but here we have 26,000 at best.

This has the unusual advantage, among Green Party policy insistences, of actually being true. Renewables produce more jobs per TWhr of electricity produced than fossil or nuclear. Therefore installing solar or wind instead of fossil or nuclear lowers productivity.

Productivity is defined - defined note - as output at market prices divided by labour hours to gain that output. So, a TWhr of electricity is worth whatever it is and if we now have more jobs producing that TWhr of electricity then labour productivity in electricity production has declined.

That’s simply a definitional truth.

Whole economy productivity is calculated by GDP divided by labour hours. That’s just what it is. So, we move to more labour heavy methods of producing GDP then productivity declines. That’s just maths.

As we’ve been known to say, jobs are a cost, not a benefit. But the point here is not to make some right wing, or free market, or we’rebeingpaidbythefossilfuelcapitaliststosayit point, rather this is all simply definitional.

To switch back the other way for a moment. Much of modern economic policy is concerned with externalities. Those CO2 emissions, those pollutions, the unfairnesses in life which are not well dealt with by pure market economies. Some of those dealings with we agree with, others we don’t. But again, that’s not our point here.

Externalities are, by definition, those things which do not appear in market prices. They do not appear in GDP therefore - which is calculated at market prices. So, the more we deal with externalities then the lower productivity will go.

For, by our standard and mutually agreed definition of productivity - again, labour hours in, output out at market prices - we are carrying the costs of dealing with those externalities in the labour hours put in without measuring the output from them in that market price measure of output.

Again, this is not a political point, it’s purely definitional.

The entire climate change problem is that standard economic accounting doesn’t include the costs of boiling Gaia. So, now we do the work - create those jobs in solar - to not boil Gaia. But standard economic accounting doesn’t include the benefits of not boiling Gaia but does the costs of not doing so. That’s just what an externality means.

So, as we address externalities then productivity declines. Not because we should not address externalities. Not because climate change is, or is not, some WEF cooked up nonsense. Or even, a catastrophic threat to the very existence of our species.

We are addressing externalities. We are, when we do so, measuring the labour costs of our doing so and not the output of our doing so. Therefore productivity declines as we address externalities.

QED.

Again, just to beat up on the dead equine again, this does not mean we should not address externalities. It illuminates precisely nothing in the debate about whether to have solar or nuclear.

What it does do is enlighten us as to one of the reasons why productivity numbers are flatlining. We’re addressing non-market costs - those externalities - so when we measure productivity by market output we’re not capturing the benefits of those actions while we are the costs.

This is just definitions and maths - not even maths, it’s arithmetic.

By addressing externalities we reduce measured productivity. Which makes the commonality between those shouting that we must address externalities and those whining about capitalism’s failures as productivity flatlines, well, it’s cakeism, isn’t it?