We'd just like to point out a certain economic detail

Given that this is from Willy Hutton of course it’s somewhere between misleading and wrong. But why is it?

Britain is suffering from an intensifying four-decade-long investment drought in the public and private sectors – the root cause of the crisis in stagnating productivity and living standards that shapes our politics and daily lives.

Whether or not the gross amount of investment is too high, low, about right, is not our point. Rather, where it’s going is. For where whelpingly massive amounts of what investment that does happen are going does, by definition, reduce recorded productivity.

We would also argue, quite a lot, about living standards and even GDP. Living standards are determined by GDP plus the consumer surplus, not by GDP alone. Much of the technological development of the past few decades has vastly increased that consumer surplus which also either not being fully included in GDP or sometimes even reducing it.

There are those estimates that Google and free email are worth $18,000 a year per head of population, that Facebook is valued at $800. As Hal Varian has been known to point out, GDP doesn’t deal well with free. The consumer surplus is there in such things but not the GDP (which is actually just the advertising on those things, not the value of the things themselves). We’d also use the example of WhatsApp. This has no revenue associated with it at all, no ads, no subscription. There is therefore no output measure at all in GDP. Yet there are costs of course - a couple of hundred engineers in Facebook last time we asked them. That means - labour costs, no associated measured output - that WhatsApp is in economic statistics as a reduction in productivity. Despite 1 billion people gaining some or all of their telecoms from it - for free.

But we can and should go further than that. We all know there’s a vast amount of investment happening in this going green stuff. Maybe that’s a good idea, maybe not, that’s for another day. But the point of what is being done is to address an externality - those environmental damages, costs of emissions, which do not show up in prices and therefore are, again, not in GDP. So, we solve those externalities - and maybe we should! - and we create green jobs while doing so.

Cool. So, now we have the same output - say a GW of ‘leccie, even a GWhr - with the same value as before but we’ve used more human labour to produce it - those green jobs that the energy transition creates. By definition productivity has declined. Again, by definition productivity has declined.

Investing in not boiling the planet seems fine to us. An increase in the consumer surplus pleases us, not worries. But one thing you simply do not get to do is insist that we solve externalities then worry that GDP is not moving as a result. That’s just a fact of solving externalities, things that are not measured in the price system. Further, if we create lots of jobs to do things in non-polluting ways - again, not something that we’re necessarily against - then you don’t get to complain about falling productivity. Because that’s the outcome of the very thing you’re demanding we do. Creating jobs is reducing productivity, they mean exactly the same thing.

Yes, we know, here’s no excuse for Willy Hutton. But we do still wish for even a little intellectual clarity on these simple economic points. Going green reduces labour productivity. The country’s been investing vast amounts on going green. Yet people then wonder why labour productivity’s not rising?

Sheesh guys, try reading a book.

Could we hope for sentience?

No, this isn’t about AI, this is about the housing debate. Where we should hope for something better than we’re getting. Perhaps not sensibility, or good sense, but how about we start by hoping for sentience?

To start with, this defines the crisis, wrongly, as being exclusively about the quantity of homes available. But (and leaving aside the fact we have 1.5 million more dwellings than households: ONS/census data), the crisis is actually about the cripplingly high cost of buying or renting a home and the short supply of social housing – very different to ‘not enough homes’.

Dig a little deeper and you get the ‘supply and demand’ argument: ‘increasing housing supply will bring prices down’. But this logic doesn’t work if demand stays high.

Yes, there’s much else wrong with that piece from the Campaign for the Protection of Rural England.

But our hope - not even a demand, merely a hope - that we might be able to observe a little economic sentience when matters economic are being discussed?

Leave aside that ignorance of the really basic stuff about supply and demand and focus on that last - “if demand remains high”. But if demand remains high then that’s the reason itself to build more houses. People want there to be more houses - that’s high demand. Therefore there should be more houses because that’s what people want. They’re actually insisting that because people want more houses therefore they shouldn’t be allowed.

As we say, sentience in the debate would be useful. But what really worries us is that CPRE has an input into housing policy. How did we end up with the economic understanding of this level being an input into public policy formation on matters economic?

Governments - politics - are simply bad at maintenance

That’s the lesson to take from this:

An increasing number of England’s pothole-plagued roads will be completely resurfaced, ministers have said as councils are handed £8.3 billion for repairs.

Councils will be urged to use the money to fund long-term improvements, including full-scale resurfacing, rather than quick fix repairs as part of a new decade-long funding settlement.

To ensure this, for the first time, the cash will come with a condition that local authorities publish resurfacing plans every quarter, so motorists can hold them to account.

The revenue raised from charging people to use the roads is vastly greater than the costs of building and or repairing roads. So there’s our first clue - actually private roads would cost less and also be better maintained because there wouldn’t be that leakage of some 60% (our guess) of the revenue into other things that usefully buy votes. Government’s an inefficient method of providing roads that is.

Secondly, government is simply a lousy way of maintaining anything. For maintenance never does gain political presence or visibility. Routine patching of holes doesn’t make political careers - perhaps it ought to but it doesn’t. Big plans to splash the cash do make careers - as here. So, doing the plodding boringness that needs to be done isn’t done by politics. A corollary here is that we’ve already got methods for voters to hold local authorities to account. Called elections. And if we’re suggesting that these don’t work in doing so then we’ve got to call our basic manner of democracy into question, don’t we?

The third issue here - that unseen that the economist should look for - is that if we’ve just proven that governments are grossly inefficient providers of roads themselves, let alone maintenance, then what else is currently run by government and politics that badly? What else should we be privatising so that we can have the same at a lesser cost, or more for the same cash?

It really is true that fuel duty (alone, before VAT and other such taxes) is £25 billion a year, spending on roads is about £12 billion. Private roads would be cheaper that is, as even the most vibrant capitalism won’t soak that much in profit off the revenues. So, what else also meets this standard of currently being done grossly inefficiently - so that we can make ourselves richer by not doing it through the medium of government and politics?

Leasehold Reform- a Vote Winner?

There are over four million leasehold properties within England and Wales according to the Government. This represents a sizeable number of voters. First a little bit of background.

In December 2017 Sajid Javid, as Secretary of State, commissioned the Law Commission to find ways to make it ‘easier, faster and cheaper’ for leaseholders to extend their lease and buy the freehold (the Labour Government under Tony Blair tried to do this in 1997). The King’s Speech on 7th November unveiled the Government’s proposal.

A number of the proposals are pragmatic. The introduction of 990 year leases with a ground rent of a peppercorn is a sensible way forward, as is allowing purchasers to immediately pursue a lease extension/enfranchisement rather than wait the current two years of being registered at the Land Registry. It is also pragmatic to allow the 25% commercial element to be increased to 50% for collective enfranchisement. However, there is a fly in the ointment. 

This ‘fly’ is the Government needs an easy win ahead of a General Election and by threatening to fix the rates in calculating the premium to extend the lease and abolishing marriage value to make it cheaper for leaseholders there will be a costly and lengthy legal challenge. Freeholders have already stated they will mount a fierce legal challenge if marriage value is abolished and they are not paid ‘fair’ value representing current market evidence. The Law Commission was so worried about this they took leading counsel’s opinion on this matter, who warned there was a high risk of freeholders being successful, which would cost taxpayers tens of billions of pounds. 

The reality is the introduction of new 990 year lease means marriage value (only payable under 80 years) and ground rent will naturally fall away. Consequently, the Government pursuing this policy seems reckless in the extreme, especially when taxpayers might have to pick up the bill.

Is there a workable solution?

Our team of academics offered the Government a real time working calculator, which uses market evidence and is updated daily and it keeps marriage value (much reduced due to proper peer reviewed research) and can reduce the amount payable by up to 62%. 

Millions of leaseholders need reform and Government needs a success and taxpayers should not be made to pick up the bill to the tune of tens of billions of pounds when there is a workable solution. All political parties are in favour of reform, but it must be done fairly and without cost to taxpayers.

No plan, never mind a decent one

When it comes to announcing its targets without the slightest idea of how to achieve them, the Department for Energy Security and Net Zero (DESNZ) is world beating. Wisely or otherwise, DESNZ set its key target for net zero carbon emissions by 2050. Initially, emissions fell, largely because the UK exported carbon-emitting industries. In March 2022, the Public Accounts Committee report concluded: “The government has unveiled a plan without answers to the key questions of how it will fund the transition to net zero, including how it will deliver policy on and replace income from taxes such as fuel duty, or even a general direction of travel on levies and taxation. The government has no reliable estimate of what the process of implementing the net zero policy is actually likely to cost British consumers, households, businesses and government itself.” In other words, it had no plan.

 In July 2022, Mr Justice Holgate ruled, in effect, that DESNZ had no plan to achieve its objective and they should prepare and publish one by 31st March 2023. In the event, no plan emerged and on 15th November 2023, the Public Accounts Committee reported on how DESNZ was managing innovation and its contribution to achieving net zero carbon 2050. It found it to be short-termist, muddled and had no central management.

DESNZ has published numerous aspirational papers on what might be achieved but none bring the whole picture together or explain what the overall energy/electricity needs will be or how they will be generated without carbon emissions. On low wind and sun days, renewables and nuclear will be inadequate and so fossil fuels, with carbon capture, usage and storage (CCUS) will be needed into the foreseeable future.  For example this month, wind  generation reached a low of 0.4GW (1.7% of demand). Nominal installed wind capacity is over 27GW. As of now, CCUS is commercially unproven in the power sector, so it is all a bit speculative. 

At the 8th November Oral Evidence session with the ESNZ Select Committee, the Secretary of State claimed “we’re now spending £20 billion on carbon capture and storage”. Clearly net zero carbon will be impossible without CCUS. DESNZ claims the UK will be the world leaders in that and has set up a council to achieve it: “Commissioning of the first CCUS facility from the mid-2020s would help the UK to meet our ambition of having the option to deploy CCUS at scale during the 2030s, subject to costs coming down sufficiently.”  The £20bn is possible in the future, but not currently and needs clarifying. It is not clear whether this should be government funding.  Surely the responsibility for, and costs of, decarbonising fossil fuel emissions should lie with the fossil fuel generators.

The creation of the UK’s CCUS market lies with its Council, inaugurated in 2018. Its last meeting was on 27th June. Some 45 or so members, including the Director, CCUS, DESNZ and his five deputies, discussed bureaucratic matters, like reporting lines, with little evidence of practical haste. The idea of having “a timeline to understand industry progress” was introduced.  Fancy that! Things would move a lot faster if they were left to the fossil fuel companies.

The overall picture is that DESNZ in inadequate. What do its 8,498 staff actually do? Probably around 44% work from home.  The ESNZ Select Committee held a brief Inquiry into what DESNZ actually does. The new Secretary of State was not asked how the 2050 targets might be achieved, so it might be described as a soft ride but other ESNZ Committee inquiries are addressing those issues and will be reporting next year. The bottom line is that we have this vast number of people in DESNZ, their main target is achieving net zero carbon emissions by 2050 and, after years of prodding, have still not produced a plan, never mind a decent one, to achieve it.

UK industry is back-peddling on CCUS as they wait to see how tough the post-election Government will be on CO2 emitters. The current Government seems to be supporting this by allowing the Emissions Trading Scheme to decline in effectiveness as evidenced by the UK’s falling carbon price, in sharp contrast to the rising carbon prices in other countries. The Sunak Government seems to have thrown in the towel on tackling climate change and will, I imagine, keep a low profile at the upcoming COP. 

Expressive Choices

Why do we have a bigger welfare state than is good for us?

But then, before I tell you why, I’d better justify that assertion. So just take the case of my own country, the UK. Here, the government spends nearly half of everything its citizens earn—and then it borrows. And the biggest chunk of its spending goes on the three big-ticket welfare-state items: health, education and welfare (including housing). 

That makes the welfare state a significant cost on taxpayers. And of course high taxation is very damaging for individuals and businesses, particularly small and new businesses, while the interest payments on the government’s debt raises those costs even further and reduces its scope to spend on something useful.

There are also the dependency and incentive issues. With state welfare focused on the poorest, many find themselves trapped in dependency. If they try to improve their own condition, they find their benefits being reduced, often very quickly. That tapering, combined with the high taxes needed to sustain the welfare system, discourages individuals from seeking work, or moving to better-paid jobs. The result is a lower national income, and reduced labour market flexibility, leading to a fall in the productivity of the economy.

State welfare is also poorly targeted and wasteful. The amount of money we spend on it could make our poorest citizens relatively rich; but much of it lingers in the pockets of those who administer the system, while much more goes to people who do not genuinely need it. Nor does it really help people out of poverty: it simply pays them cash, rather than looking at what they need in order to prosper.

Moreover, state welfare crowds out more targeted and effective interventions such as private charity and philanthropy. And it suggests to taxpayers that their obligations to their fellow citizens have been dealt with for them, making them less willing to take on responsibility themselves. 

I could go on, but you get the picture. We all know the system is inefficient, badly targeted, bureaucratic, wasteful and often counter-productive. So why do we keep voting for it?

I think the answer may lie in what economists call ‘expressive choice’ — as opposed to the phenomenon of ‘instrumental choice’. An instrumental choice is one such as you would make in a marketplace. Perhaps you want a new coat. You go into the shops and choose one from the variety of different coats on offer. You pay your money, and your choice turns into reality—you have the new coat you wanted.

Expressive choices are those such as you make in elections. The chance of your vote making an actual difference—being the single vote that decides if one candidate defeats another, or whether a referendum succeeds or fails—is miniscule. Usually, it is millions to one. So, unlike your coat transaction, you do not always get what you choose. You vote for one candidate, but another succeeds. You vote for one policy, but another is put into effect.

How, then, do people respond to that? One answer is that they vote for things that make them feel good. You can vote for anything you like, because your choice is not actually going to make a difference. So, people vote for high-spending pro-welfare candidates because they see it as a way of ‘helping the poor’—and indeed a way of ‘helping the poor’ that is absolutely costless to them (unlike the coat transaction). So why not?

The trouble is that it isn’t absolutely costless. The costs of all those welfare state programmes mount up, and voter-taxpayers feel the burden of it. And the inefficiencies and disincentives mount up too, which burdens them and everyone else too. 

I don’t see any way out of this welfare ratchet in a democratic system. Perhaps we need to lay down limits on what that system is there to do, and can do and can spend. But I can’t see politicians voting for that.

Wrong decision Prime Minister, wrong decision

No, this is wrong:

Offshore wind projects to receive subsidies boost after auction flop

Claire Coutinho to announce 70pc increase to guaranteed price offered to developers

There are detailed complaints being made about it. For example, one claim (which we do not endorse, nor claim is either true or wrong, merely present it):

Remember its not £73. That's in 2012 money.

The new cap is more like £96 in current money.

The European spot price for gas is around €60 per MWh currently.

But whether that’s true or not the decision is still wrong. It violates the basic logic about climate change, that sort of wrong.

To start with the very basics. The claim is that emissions cause costs. We’ve certainly no problem with the idea that there are externalities - markets are great things but many things are not included in markets and are therefore not great. The answer is to include those things in markets so that markets can work their greatness upon them.

So, how much should we do about something? Our aim is the maximisation of human utility over time. The universe - sadly, the cow - imposes limitations and constraints upon us in that task. Resources are, after all, scarce. We also know that doing anything has costs - at very minimum there are opportunity costs, near always there will also be direct costs. So, whatever the thing, problem, constraint or externality we should do the amount that maximises that utility. This means balancing the costs of doing the thing - no, costs here do not mean mere money, they mean those other things we cannot do because we devote our scarce resources to do this thing - against the benefits of doing that thing to so maximise utility.

So, the price of wind power changes. Why doesn’t matter. A bait and switch by developers, a change in real world prices, makes no difference. Therefore the optimal amount of wind power to maximise utility changes.

That is, wind power changes in price therefore we should have a different amount of wind power - not change wind power prices via subsidy so that we get the same amount of wind power.

This is true of every decision about climate change. Whether to do adaptation or mitigation, which specific energy technology to use - solar, wind, fossil, geothermal, whatever - which transport, what foods to eat and everything. When prices change we should be changing the quantity demanded of each of them - that’s in fact what prices are for, to tell us about quantity.

It’s not economic to stick towers of steel in the North Sea environment? Well, then it’s not economic is it, we should do less of that. We’re even willing to agree - for the sake of this argument - that it’s no one’s fault, this change in offshore wind power prices. It is still true that the change itself, the rise, means we should have less of it. Instead, more whatever - fossil, carbon capture, solar, tidal, geological hydrogen, geothermal and on and on.

Prices have changed, as is obvious. Therefore the correct answer is that both supply and demand should.

We therefore present how that meeting with Ms. Coutinho should have gone:

Offshore Wind Developers (for it is they): “Minister, we can’t build at these prices, just can’t.”

Ms Coutinho: “Well, thanks for trying, Guys. Goodbye.”

Carbon Sequestration: a Net Cost to Our Net Zero Strategy

Carbon sequestration has long been discussed as an essential tool in our quest for net zero. Given that we will likely rely on carbon capture methods to offset over half of the UK’s residual carbon footprint in 2050, it is important to examine the options available and the feasibility of their application over the coming decades.

There are two categories of carbon capture techniques: natural and artificial. The main methods in the former category involve afforestation and reforestation. Given that planting a forest the size of Greater London would over 100 years only offset the next two years of UK carbon emissions, it seems appropriate to focus mainly on the second group.

From extracting carbon dioxide from seawater in Devon, to heat-powered methods at Sizewell C, there are dozens of innovative carbon capture, usage and storage (CCUS) methods being funded by Government net zero investments. Issues only arise when we begin to evaluate the costs of these technologies versus the benefits they provide.

There are two key figures to examine. Firstly, the social cost of carbon: the present value of the damage done by a tonne of CO2 released into the atmosphere. William Nordhaus, 2018 Nobel laureate in Economic Sciences for his work on the economic implications of climate change, has called this “The most important single economic concept in the economics of climate change”, and estimated it in 2017 to be $31/tonne CO2. (It should be noted that there is disagreement around this figure, because of how we weigh impacts on future generations and developing countries. Most papers put the figure around $20-60.)

Secondly, is the price of extracting one tonne of carbon from the atmosphere by these methods. A report cited in 2019 by the BEIS committee stated a cost of £80-160/tonne of CO2 prevented from entering the atmosphere at gas-powered electricity plants.

Assuming a reduced dependence on fossil fuels, carbon capture will likely come from Direct Air Capture (DAC), rather than being attached to a power plant. A planned British DAC plant hopes to decrease costs to £200/tonne. The International Energy Agency has stated that in the best locations and using the best technology, DAC could fall below $100/tonne.

These prices must therefore fall by 50-90% in the next two decades for carbon sequestration to be cost-effective. This is unlikely since most of the cost is from the electricity required by the process, and excepting a breakthrough in nuclear fusion, the price of electricity is unlikely to fall much in the UK, if at all. If this does not happen, capturing carbon could cost more than leaving it in the atmosphere. Given the number of people still sceptical about climate change, funding cost-ineffective policies which will hurt them more than climate change will is not the way to convince them of the very real harms caused by CO2.

The UN Intergovernmental Panel on Climate Change’s latest report shows CCUS to be the most expensive of 31 mitigation options, and exhibiting the joint-lowest potential contributions to net emission reduction. Perhaps unsurprisingly, the Government has not included any discussion whatsoever of CCUS prices across 550 pages of Net Zero, CCUS Strategy or Clean Growth Strategy documents.

It is of course possible that we will succeed in reducing costs. However, there are currently no commercial applications of CCUS in the UK, and even if technology improves, the projects in Devon and at Sizewell C are predicted to bottom-out at £100 and £200/tonne of CO2 removed respectively.

If new methods are to be developed and carbon capture is to become a serious and cost-effective method for reaching net zero, it is far more likely to happen in the Middle East or China, which have comparative advantages in developing this technology. Given the UK’s reluctance to support large infrastructure developments within our own borders, it could be beneficial to partner with these nations and use British brains to aid them in developing these important technologies which, if successful, could then be applied here.

Given these realities it appears that without significant technological breakthroughs to lower capture costs, or unlikely catastrophic climactic changes to increase carbon’s costs, carbon sequestration is likely to be a net cost to our net zero strategy.

This sounds like a remarkably bad idea

Confiscate properties from rogue landlords, says senior Labour MP

Clive Betts says seizure threat would create ‘significant deterrent’ among those who treat fines as business cost

Do what we don’t like and we’ll seize your assets.

What could go wrong?

Rental homes should be confiscated from private landlords who repeatedly break the rules and exploit tenants, the head of the Commons housing committee has told the Guardian.

Clive Betts, the chair of the levelling up, housing and communities select committee, said handing courts the power would create a “significant deterrent” to landlords who treated fines for letting out squalid, unsafe and overcrowded homes as simply a cost of doing business.

As we noted yesterday it’s not always obvious that it’s “private” landlords doing the wrong thing:

Depending upon how you’d like to spin those classifications you could say that either is worse than the other. It is, perhaps, the lack of control on the part of the tenants from it being rental housing which is the problem, not dastardly landlordism nor state slummery.

So, Mr Betts, why is there that qualifier there? Private, not just landlord?

Not that we’d agree with you anyway but until you explain that no one should.

Fie, be off with you.

We find it's always worth checking

The construction here seems a little forced:

The problem is that the people largely affected by suboptimal housing have little power to change it. Notably, damp is five times more common in private rentals than in owner-occupied homes. Roughly 20% of people live in private rented homes, with 520,000 of these properties in England posing serious health problems including cold, damp and mould. Even when these problems are raised with landlords, action doesn’t follow. Renters don’t have the ability to force landlords to improve living conditions, and instead fear an eviction notice or a higher rent being imposed.

Hmm, OK, that’s not good. But as we say, the construction seems forced there. We should really be comparing council and social rented with private rented, no? So we thought we’d have a look.

Social:

While the picture is incomplete, our best estimate from the initial survey was that fewer than 0.2% of social homes have the most serious damp and mould problems, 1-2% have serious damp and mould problems, and a further 3-4% have notable damp and mould.

Private:

On average, 3.6% of private rented sector properties were estimated to have category 1 damp and mould hazards. The lowest estimate was 0% and the highest estimate was 27%. 33% or 83 local authorities (of the 251 who provided estimates that could be included in the analysis in this report) estimated 1-2%. The median estimate was 1.2%.

Now those are not exactly the same measures nor classifications. But they are both government numbers.

Depending upon how you’d like to spin those classifications you could say that either is worse than the other. It is, perhaps, the lack of control on the part of the tenants from it being rental housing which is the problem, not dastardly landlordism nor state slummery.

Which might explain the forced construction there in that first quote from The Guardian. Comparing rental to owned shows a difference, showing social rented to private rented perhaps does not - but that wouldn’t advance the project, would it?

On that, on the project, there is good news though. Sir Keir has just announced that Labour will work so that everyone will be able to buy their own home. We have to admit that we’re not quite sure about that, there are stages of life where a rental is the better solution. However, think of it this way, as of how far the Overton Window has shifted over the decades. It’s now the leader of the Labour Party insisting on fulfilling Maggie’s dream of the property owning democracy.

Which is fun, no?