One wing good, two wings better

90 years ago, the Air Ministry dismissed monoplanes as fighter aircraft on the grounds that biplanes had served us well in World War 1 and biplanes were what our world-beating aircraft industry built. The fact that monoplanes were breaking airspeed records and winning international races merely indicated their suitability for amateurs. It should have been no surprise, come 1939, that British “string bags” proved no match for the Luftwaffe’s monoplanes.  Luckily, and just in time, the private sector had rebelled and put the Spitfire, and then the Hurricane, into production. MIT Professor Eric von Hippel has long demonstrated that “user innovation” is more successful than that by bureaucracies. 

The Department for Business, Energy and Industrial Strategy (BEIS) exhibits the same “two wings better”. It is widely accepted that a zero carbon 2050 means that most electricity by then will have to be generated by renewables and, because the wind does not always blow, nuclear. BEIS is committing us to the third generation of pressured water reactors (PWRs) like Hinkley Point and Sizewell C. They expect those to be followed by Rolls Royce which is “planning to build 16 Small Modular Reactors [SMRs], and says the first one could be on the grid by 2031.” There are a number of other types of nuclear plant that BEIS could be evaluating but the most attractive looks to be Molten Salt Reactors (MSRs).  However, BEIS does not want to consider those before the 2040s. 

There is no BEIS analysis today, e.g. in the White Paper, of the best options.  PWRs roll on because that is what we have done before.  PWRs purchased from EDF, described by Alistair Osborne, The Times Business Editor as “the cost-overrun and late-delivery specialists behind the consumer-fleecing £22.5 billion Hinkley Point C.” What with flood risks, ecological damage and nuclear waste disposal, these are unpopular and virtually banned in Germany. Seven of the existing eight UK plants need decommissioning by 2030 and it would seem that we can expect more of the same out-moded PWRs. 

The case for the Rolls Royce SMRs rests on Rolls Royce being British.  If any performance or cost comparisons have been made, they have not been published. The case for MSRs rests on safety, size, cost, and rapid deployment. We should look at those in turn. 

“The basic idea is to dissolve the nuclear fuel in a liquid – a molten salt at 600-700 degrees C – that is continuously circulated through the reactor core. In the core, the liquid-carrying channels are surrounded by neutron-moderating material (mainly graphite), which provides the conditions for fission chain-reactions to occur in the dissolved fuel. Leaving the core at a higher temperature, the fluid runs through a heat exchanger, transferring the extra heat energy to a secondary circuit. It is then recirculated back to core.” I am not sure that explanation leaves me much the wiser.  Let’s just say, it is high tech and it works. 

MSRs operate at low pressures without the need for large containment structures. Radioactivity declines as they heat up with no risk of radioactive isotopes escaping.  They are small, built on a factory production line and delivered by road. They can also be mounted on special barges and moved close to where electricity is needed. They do not need large quantities of cooling water which means that they can be located inland. 

Capital cost estimates are in the range £1.5m to £2.5m per megawatt (MWe) of output. This is significantly lower than the capital cost per MWe of output of Hinkley Point C (currently around £6.6m per MWe) and would make electricity from molten salt reactors cheaper than electricity from gas fired power stations. 

Total costs (including running costs) are compared using the ‘Levelised Cost of Electricity’ (‘LCOE’). The LCOE for molten salt reactors is in the range $40 to $50 per MWh. For comparative purposes, the LCOE for conventional nuclear is in the range $118 to $192 per MWh. Offshore wind is estimated at $111 to $115 per MWh.  

MSRs were successfully tested in the USA in the 1960s. The Seattle-based USNC expects to get approval for a demo plant in Ontario in 2022 and commercial operations are due to start in 2026. At the end of 2021, the Washington State based ThorCon will begin the first stage of construction of its 500MWe demo plant for installation in Indonesia by the end of 2024. Most of their plant will be built in a Korean shipyard. Using rapid modern shipbuilding techniques, they will be able to build most of a plant in a year. ThorCon started as outsiders in the industry – but so was Elon Musk and he is now well ahead of the traditional car makers.  Moltex and Terrestrial Energy, both with offices in Canada, the US and the UK, have received large financial backing from both the US and the Canadian Governments. USNC, Terrestrial and Moltex are the front runners to produce cheap electricity for the Provinces of Ontario and New Brunswick by 2029. Those companies estimate dates for deployment of full-scale MSRs in 2024 (Indonesia), 2027-2029 (Canada, USA & Denmark) and 2030 (China).

It really is remarkable that BEIS should ignore international developments and fail to cost or compare the options available. Some people might consider that unprofessional. Unless Kwasi Kwarteng wakes up soon, the UK will be 20 years behind other leading nations.

As we enjoy pointing out, private equity pays very well

The scolds over at the High Pay centre keep telling us that CEOs get much too much money. Quite why said scolds have an interest in how shareholders spend their own money is unexplained but they do keep making the point.

One of their explanations is that the diffuse interest of shareholders in a publicly listed company means that the CEOs as a class - to include all those directors, exec and non-exec - get to bamboozle the owners into those high payoffs. If this were true it would not be, could not be, a problem which affects private equity. For there the shareholder interest is, by definition, concentrated and presumably more than a match for those employees, however senior they may be:

The chief executive of Dr Martens is set for a £58m windfall in a stock market listing tomorrow which could see the bootmaker valued for as much as £3.5bn.

Kenny Wilson, who has led the business since 2018, is one of a number of bosses in line for a combined fortune of £350m, The Sunday Times reported.

Dr Martens has flourished under its private equity owner Permira, which has invested in the company’s stores and online business, helping sales to soar almost six-fold to £672m since it took control in 2013.

Ah. So that’s that theory killed off then. The presence of a concentrated shareholder interest, rather than the diffuse which is to be bamboozled, leads to higher, not lower, pay.

As with that CEO of Entain who is off into private equity for five times his public company pay.

The reason CEOs get paid a lot is because shareholders value the services of CEOs. Whether they should or not is of course another matter but since it’s their money to spend as they wish what business is it of the rest of us?

How joyous to see the Laffer Curve in the wild again

A little reminder for those who insist that the Laffer Curve is just a product of an overactive - and neoliberal of course - mindset:

NHS workers who have taken on extra shifts in the fight against coronavirus are at risk of sleepwalking into giant tax bills.

Doctors and healthcare professionals working overtime during the pandemic could face eye-watering charges because of continuing issues with the “tapered” annual allowance for pensions.

The contention of that Curve from Art Laffer is only that at some tax rates increasing the rate increases revenue collections, at some other set of tax rates an increase in the rate reduces revenue. Simply because some people will look at what they have left after the tax and decide to go fishing rather than to work. Thus, if we find people not working because of the tax rate we can be sure that the original contention - that tax rates can be above maximum revenue collection - is true:

Higher-earning NHS staff have been burned by hefty duties, forcing some GPs to cut down their working hours or retire early.

Dr David Stevens, 57, a full-time clinician whose name has been changed, said he had no choice but to turn down extra shifts out of fear of a big tax penalty.

Dr Stevens, who earns £110,000 a year, said: “I’m up to my neck in Covid-19 cases but the size of my tax bill is what keeps me awake at night.”

There we have it. There is only a certain amount of money to be shaken out of the people who work for a living before they stop doing so. This also, clearly enough, places an upper limit upon how much government we can have without making ourselves poorer.

Having proven that the concept is true we must go on to consider whether we’re already at this limit or not. And, given that we are already seeing the withdrawal of labour due to those tax rates, we must conclude that we’ve already got more than the optimal amount of government. Not something that surprises us of course but nice to be able to see the proof alive and well out there in the wild of our economy.

The begging bowl is usually a little better hidden than this

The claims here might actually be true. That the development of electric vehicles in the UK requires that there be a UK electric battery plant. Further, that such a battery plant requires advantages in order to be created.

We can’t say that we’re convinced of this, we see no reason why it should be necessary, nor even desirable, that the two pieces, the car and the battery, be made in close geographic proximity. After all, the diesel engines for BMW’s mini are made in Austria, international supply chains are hardly a novelty in the car business.

But imagine that it’s true, it’s then still true that the begging bowl is a little better hidden than this:

The Government must attract battery-makers to the UK with the same determination that Margaret Thatcher showed in the 1980s when major car producers were convinced to invest in Britain, a leading industry figure has said.

Former Aston Martin boss Andy Palmer, who is now vice-chairman at European electric vehicle battery producer InoBat, says the future of British carmaking depends on new technologies developing on these shores.

"We’ve got to be mindful of local production," Mr Palmer said.

"Car-makers will want batteries near their factories and the Government has to go all out to attract and support investment in a UK battery gigafactory.

"It’s an existential threat now, just as the UK car industry faced in the 1980s."

“Subsidise me!” is a common enough demand but as we say, it’s normally a little more subtle than that. We’d suggest Mr. Palmer try to develop his argument a little more than that.

As for the rest of us given the clarity here an answer is easy enough to come to. Specific benefits - whether tax, grant, planning, whatever - don’t need to be, shouldn’t, offered to this or any other sector. If we do have rules - tax, planning, other - that prevent economic development then of course we should be getting rid of them for all developments, not just those who hire a PR firm. If it is true that aid is required then that’s evidence that the system itself is too restrictive, not that a specific sector deserves said aid.

Hayek was right about the National Health Service

No, not that we’d all become slaves the moment that the NHS tottered into action. Not that he said that anyway - rather, that once health care was politically delivered then health itself was going to become a political matter.

George Monbiot complaining about this in his column:

A recent study shows that diseases mostly afflicting women tend to receive less funding than those mostly affecting men. Scientific effort is also, to a large extent, a function of the effectiveness of patients’ campaigns.

When medical care is run by the political system then of course politics will determine what is treated and how. When medical research is allocated by politics then political power will determine what gets researched.

The problems with Monbiot’s complaint is that this is the world that those on the left desire. That all of these things be allocated by the political system. Therefore, of course, it is going to be political power - threats to vote or not vote, campaigns to whip up the populace, the clamour of public politics that is - which will determine investigation.

Why, that is, is the complaint about the world they themselves have created? Or even, how dare they complain about political allocation when they campaign for political allocation?

Unilever's mistake about the supply chain

This is worse than a mistake, it’s an error:

Millions of people around the world are in line for a pay rise after Unilever pledged that every worker in its supply chain will earn the living wage by 2030.

One of the canonical works of popular economics is I Pencil. An inverted reading of which is that the supply chain of something - of anything at all - is the global economy.

As it’s not possible to ensure that everyone in the global economy is paid a particular wage the effort is doomed from the start.

The consumer goods giant said it will require its direct suppliers to pay staff a local living wage that allows “workers to participate fully in their communities and help break the cycle of poverty”.

That may be how it starts, to that first level of the supply chain. But that’s not where the demand is going to end - we’ve seen that with boohoo and Leicester. The fashion chain has been critiqued because companies three and five levels down that supply chain might, possibly, have been employing the undocumented on less than the national minimum wage.

The underlying misunderstanding is the old one about the planning of an economy. That from some point we can determine what happens though out the complexity and near chaos of a global economy. Here it’s the payment of a certain income but the same desire has been applied, at times, to output prices, volume and detail of output and so on. All such attempts fail for the same simple reason,.

It’s simply not possible to know, to the required level of detail, what the supply chain is. Because it is all those 7 billion people out there and their interactions. This is not something controllable therefore attempts to control it will fail.

It’s simply not going to work.

Zambia buys a copper mine - the most lively experiment is about to happen

Zambia is buying the Mopani copper mine from Glencore. Glencore is lending the bankrupt - well, it’s in default, anyway - country the money to buy the mine. This is going to be a fascinating experiment.

We can’t help but think that the timing’s a little wrong. Zambia sold the mine, or at least Glencore took it over, back in 2000, when the copper price was 65 cents per lb US. Today it’s $3.50. Selling at the bottom and buying at the top doesn’t look that great a deal for Zambia it has to be said.

So, why do this? Well, it’s as we pointed out back here. Various of the NGOs have been really insisting, really most insistent, that Zambia is being ripped off by the price it gets for its copper. There was all that nonsense from Alex Cobham when he was at CGD about how prices varied by hundreds of percent from what they ought to be. Gobbledegook as it turned out.

But the underlying insistence still burns bright in many. The poor country is ripped off by the ugly foreign capitalists.

But now we’ll see, won’t we? Will the mine be better managed? Will the price received for the copper improve? Will Zambia actually gain from not being exploited by the Big Bad Capitalists?

Our point here being a simple one. The experiment to work this out is now being undertaken. We will in fact find out, in a few years, whether the rip off was happening or not. And the evidence will be simple too - is Zambia going to gain from not having Glencore owning the mine and thus controlling - recall the claim - both the export price and the import one?

Ourselves we think it’s going to go horribly wrong because there was a reason that Zambia privatised those mines at the bottom of the market. They couldn’t make any money running them directly. But leave that aside. Here we’ve now got a direct test of those claims of exploitation. Let’s not take our eye off this ball until we see the results.

You know, hold the NGO types to the proof of their claims.

Reasons for optimism - autonomous vehicles

One of the technological developments that will transform the British, and much of the world’s, economy is the emergence of autonomous (self-driving) vehicles. It will make a huge and positive change in the way in which people and goods are transported by land, sea and air. It will be a positive development because it will be faster, safer and cheaper.

The artificial intelligence that controls autonomous vehicles will not make the driver errors that are the major cause of road traffic deaths, currently about 1,750 per year in the UK, or the roughly 25,000 serious injuries sustained annually. Communication with other autonomous vehicles, will enable much of the current traffic congestion to be avoided. Journeys will be faster as well as safer.

Marine transport will be similarly autonomous, with fewer crew needed, and the enhanced ability of ships to avoid collisions with other ships or with rocks and reefs. Higher speeds and shorter transit times will be possible, speeding up the flow of trade and lowering its costs.

The automation of passenger and freight transport on roads will lower costs because machines are less costly to operate than people. There will be dislocation as the jobs dwindle for truck and bus drivers, for chauffeurs and cab drivers, just as the advent of railways and automobiles cut the jobs for coach drivers, postilions, grooms, stable boys and blacksmiths. But the economic growth spurred on by the change will itself create the new jobs to replace them. Increased productivity means more output per worker, and autonomous vehicles will make those still involved in transportation much more productive, lowering costs and increasing economic growth.

There will be autonomous air transport, in addition, involving people-carrying drones as well as the automation of more conventional aircraft. In all of these cases there will be convenience and new capability added to the safety, the speed and the reduced costs. The ability to have passengers and goods lifted directly from tall buildings will dramatically cut congestion and travel times. Artificial Intelligence can handle the traffic in three dimensions in a way that would be difficult, if not impossible, for human operators.

These developments will amount to an economic revolution, but it will be a positive one, just as electricity was, because of the opportunities they bring. Commentators who predict a future of stagnation and falling living standards are failing to account for the economic impact that technological innovations can bring. The impact of autonomous vehicles is set to be both transformative and positive.

Abolish stamp duty - transactions taxes are bad taxes

A certain head of steam is building up behind a good idea. The current alleviation of stamp duty on housing transactions should not just be extended, the tax itself should be abolished:

Better still would be to scrap the damn thing altogether, for the reasons above.

Or Tom Clougherty, formerly of this parish:

But there’s a bigger picture here, too. Stamp duty is without question the worst tax on the UK statute books, wreaking havoc on Britain’s already troubled housing market and imposing an unacceptable drag on welfare and productivity. Research suggests that its wider social and economic costs are equivalent to some three-quarters of the revenue raised – making stamp duty many times more damaging than income tax or VAT. Put simply, it’s just a bad way for any government to raise money.

Why is that? Well, by raising transaction costs, stamp duty makes buying or selling a property less appealing.

Or, as Tom quotes, a Nobel Laureate on the point:

There is no sound case for maintaining stamp duty and we believe it should be abolished.

We do actually know that it increases unemployment, just as one example. Making the housing market less liquid makes the labour market so, this being something that does increase unemployment.

Then there is the more general case made by Sir James Mirrlees, that NL mentioned above. Transactions taxes are a bad idea. Taxing land values, of consumption, or incomes, or even in extremis capital, all make more sense than transactions. For the deadweights, the losses from the existence of the tax, are all less with those other forms of taxation.

It’s also possible, obviously, for government to spray less of our money around but even without that a change in the tax system to one without stamp duty would be beneficial.

On the one off nature of a wealth tax

Jamie Hambro is sceptical of the insistence that a wealth tax will be a one off imposition:

I have some difficulty with thinking of a wealth tax as a one-off if it is repeated for five consecutive years. And I doubt it will end after five years. Income tax was introduced in 1799 as a one-off tax to help pay the costs of the Napoleonic Wars (this after a wealth tax on houses, horses and carriages and servants and another new tax – inheritance tax – failed to raise enough).

That seems a fair surmise to us. The standard economics of taxation tells us that wealth taxes are a bad idea. The little get out available being that a one off wealth tax, unannounced and impossible to dodge, isn’t so bad. But that isn’t so bad bit rests, entirely and wholly, on the one off nature of it. Which is why those who would tax wealth are telling us it will be a one off, so that it can be introduced and then made more permanent.

Yes, we can come across as a little cynical about the political process at times. But then we’ve got good reason to be. From one of the Advani and Summers papers about this wealth tax:

We do not include a measure of the expected individual value for future public pension payments. Clearly there is a relationship between the existence of public sector pensions and household saving decisions (Lachowska and Myck, 2018) but there is no contractual obligation for the government to maintain future pension payments at levels currently expected. In which case, a consistent alternative to our approach would be to include the effective value of an individual’s entitlement to the entire existing social security system.

We don’t include any part of the welfare state - not even the state pension - in our estimations of wealth because without a sound contractual relationship we can’t trust the government to actually pay such things.

But we can and must trust these same politicians when they say that a wealth tax will be a one off event. Without any of that pesky nonsense of a contract of course.

The insistence being therefore that politics is dodgy when considering paying money out but entirely reliable, keeping its word, when raking it in. We really don’t think it is cynical to suggest that electoral expediency might not work out that way.