The Pin Factory Blog

Interesting news from across the pond:

The U.S. government for the first time has enforced environmental laws protecting birds against wind energy facilities, winning a $1 million settlement from a power company that pleaded guilty to killing 14 eagles and 149 other birds at two wind farms in the western state of Wyoming. The Obama administration has championed pollution-free wind power and used the same law against oil companies and power companies for drowning and electrocuting birds. The case against Duke Energy Corp. and its renewable energy arm was the first prosecuted under the Migratory Bird Treaty Act against a wind energy company. "In this plea agreement, Duke Energy Renewables acknowledges that it constructed these wind projects in a manner it knew beforehand would likely result in avian deaths," Robert G. Dreher, acting assistant Attorney General for the Justice Department's Environment and Natural Resources Division, said in a statement Friday.

There is no possible method of having vast structures like these spinning away on the tops of hills without slicing up some number of birds. Which brings us to one of the great lessons that economics has to offer us.

There is no such thing as a solution: there are only a number of trade offs. You might indeed think that littering the countryside with bird choppers, with the attendant avian deaths, is a decent trade off to gain expensive electricity. Other might think that coal fired plant, with its mercury and radioactive pollution is a better bargian for cheap electricity. Or natural gas for slightly more expnsive but less polluting. Or nuclear, which has zero pollution except when things go very expensively wrong (although we should note that nuclear, even when it goes wrong, kills fewer than either solar or coal in normal operation). Or....well, or whatever.

Given that we always face trade offs it is the complete set of trade offs that need to be considered in any decision making process. Meaning that, yes, we do need to consider the impact of wind power on bird populations. The only regret is that that full set of trade offs wasn't considered before everyone started to build the bird choppers.

I'm always amused to see our rulers tying themselves into ever greater knots to avoid having to admit that the problem they're trying to solve is in fact just terribly simple to deal with. The latest is this idea that those who cannot afford a house should have a free building plot given to them by the State:

Young people who cannot afford to buy a home should be given land by the state so they can construct their own houses, the planning minister has suggested. Nick Boles said it would be a way of reaching out to a generation of young Britons who want to be “given the opportunity to get on and help themselves”. Instead of renting or applying for council housing, young people should be able to “put themselves on the list for self-build,” he said.

What we really have here is an admission that it isn't the cost of building a house which is the problem. It's the scarcity value of the planning permission to be able to build on a certain plot that is. It's most certainly not the cost of land itself: even in SE England this is rarely above £10,000 an acre and you can get five or six houses on that. It's not the cost of the land nor is it the cost of building a house (£120k or so for a nice three bedder). It's that chitty from the State that allows you to marry the two together that makes housing unaffordable where people desire to live.

As, of course, is being admitted here by the suggestion that a solution is to give people one of those chitties for free.

Which is a very complicated and in some senses appallingly stupid way of trying to solve the problem. For I'm deeply unsure that the country actually needs more houses put up by self-building bodgers. Nor does it need the local commissars being able to gift a couple of hundred thousand pounds to favourites by controlling the allocation of those chitties.

Why not, instead, simple reduce the scarcity value of those chitties by issuing more of them? We get to the same end point, housing becomes the cost of building plus the cost of the underlying land. No artificial pumping up of the price at all through "planned" scarcity.

We've even a blueprint for you, Land Economy by Mischa Balen.

But there's a much more basic point here too. When the original problem is government screwing things up the solution is not yet more levels of complexity but rather vying to get the government to stop screwing things up. In this case housing is expensive because government doesn't let people build houses where people would like to live. Why not get government stop doing that and the rest of us can then get on with our lives?

Hurrah for someone in government having a bright idea at last but the reporting of this is appalling:

A tax cut for City fund managers will leave the typical worker £11,000 better off on retirement, the Treasury has said. The Treasury has promised to abolish “Schedule 19” stamp duty reserve tax, which applies to some investments sold by funds. The tax cut, worth £145 million a year to the fund management industry, is politically controversial and Labour has promised to reverse it.

That's simply ludicrous. If it's a tax cut on fund managers then fund managers will benefit. If it's actually future pensioners who will benefit then it's a tax cut on future pensioners, not fund managers.

Which brings us back to the whole subject of tax incidence again. Who nominally hands over the cheque to the Treasury can be very different from who bears the economic burden of the tax. As we can see here. Nominally the tax is on fund managers buying and selling shares. But actually, the tax falls on the pension pots of savers. It must do: otherwise how can reducing the tax increase pension pots?

Fortunately this has all been well studied. The IFS looked at exactly this question a decade ago and their report is here. The conclusion is that stamp duty is, in the end, paid by pensioners in lower pension pots and also all workers in the economy as it makes capital for companies more expensive.

So, Hurrah! Investment capital becomes cheaper thus boosting the amount of it that will happen and savers gain better returns on their pensions. Hurrah! indeed.

Ed Miliband, the Labour leader, in September suggested that Labour would reinstate the tax, describing the Coalition move as a “tax cut on hedge funds”.

Yes, yes, I know this is a democracy and all that, the very ability to get elected meaning that you are indeed qualified to be elected. But please, can't we hope for a few more people who actually understand the real world? For example, Schedule 19 doesn't apply to hedge funds in the first place, only to unit trusts and open ended investment companies.

I have just published Foundations of a Free Society with our colleagues at the Institute of Economic Affairs. It was intended to describe the working principles of a free society to those who, unfortunately, don't live in one. Trouble is, that as I started sketching out all the essential foundations of a free society – freedom, property, trade, justice, toleration, moral rules, incentives, rights, and limited government – it became obvious to me that none of us really lives in a free society, and that very few of us understand it.

We all accept that democracy is a good thing, for example. And so, we are told, we should have more of it – that more and more of our lives, right down to what we eat, drink and say, should be prescribed by law. And how we run the rest of our lives and businesses should be regulated too. We simply forget the joy and necessity of human diversity and the power of competition to regulate business.

Trouble is, as readers of another of my IEA monographs, Public Choice – A Primer  know full well, political decisions are in reality interest-group decisions. They call the shots in elections. And politicians and officials have their own self-interest too. So off we go, ambling down the Road To Serfdom, imagining it is all being done for our own good, when it is done for theirs. And most of us do not know enough about the underpinnings of the free society to dig in our heels before it is too late.

The free society is not a random collection of selfish individuals. It is something complex and organic, and based on deep values – not values that challenge other moral systems but values that make cooperation and social harmony possible.

It is no easy task to build a free society out of an unfree one. The institutions of today's free (or more-free) societies have grown up over hundreds or thousands of years and reflect local history and circumstances. There is no blueprint we can give people to build their own. But we can at least give them a rough outline of the sorts of foundations they need to build freedom – or, in the case of those of us in the supposedly free West, to rebuild it.

As we know, Marriana Mazzucato's idea, that the State is at the heart of all entrepreneurial activity, is storming the weaker minds over on the left side of the political aisle. I've pointed out before that invention can indeed be done by the State: but that's not what entrepreneurialism is, not at all. And the innovation that it is is something that is done appallingly by the State.

However, here's another problem with the idea. This comes from the obituary of Frederick Sanger:

This idea was controversial at the time as, although the 20 or so amino acids that can go to make up proteins were known, most scientists believed the arrangement of different amino acids in a protein to be random. One professor had even produced a complex mathematical formula that would express this random function. Thus, when Chibnall tried to get Sanger a grant from the Medical Research Council to work on protein structure, the grant was refused because “everyone knew” that the pattern of amino acids in a protein was random.

Yes, this was basic science but the same point still stands. To explore the possible space of ideas, whether scientific or entrepreneurial, requires a multiplicity of funding sources. It cannot be just the one organisation because if there is only one then only those ideas the organisation is interested in, or believes feasible, will get funded.

That is, if we leave science or innovation to the State then we'll only get the sort of science or innovation that those who run the State either desire or consider feasible.

Ms. Mazzucato's poster child for her idea is Apple's iPhone. And we do all recall how the bureaucracies of both the US and the UK were doling out grants to people to develop such don't we? For it was indeed obvious to them that this is what 300 million people wanted to buy. Well, wasn't it?

Or perhaps I should say that there are taxes which do less damage and taxes which do more. My interest being piqued by two stories in the papers. The first is businesspeople complaining loudly about business rates:

For most business people across the country, there will be just one thing on their minds when the Chancellor delivers his Autumn Statement next month – will he act in the economic interest of the nation and announce a freeze on business rates? Business rates are an inflexible and irrational tax that thousands of companies have to pay before they turn over a single pound. We hear from our members constantly that they want to grow but are held back because the business rates imposed on new premises are too punishing for them to bear. The last thing the Government should be doing is weighing down on business growth at a time when we need the economy to move from being just about good, to being truly great. If businesses have more cash freed up from paying less in business rates, they can take on more staff, invest, export and put money back into their local communities.

The second is a different group of people complaining about stamp duty on property transactions:

The Government is coming under increasing pressure to reform stamp duty on house purchases as experts predict rising property prices will push up the total bill to more than £9bn annually. The Council for Mortgage Lenders (CML) said stamp duty paid by home-buyers already looks set to exceed £6bn this year and is predicted to grow by a further 50pc to £9bn in the next five years.

Now, given that we know that there are some things that must be done, even things that must be done that can only be done by government, we are going to need to raise some taxes somewhere, from some part of the economy. But cleartly, what we'd really like to do is raise that money where it does the least amount of damage. The OECD has a handy guide to this for us here. The measurement is of deadweight loss. How much economic activity doesn't take place because of the imposition of different types of taxes?

Repeated taxes on property, that is business rates, have the lowest deadweight costs of any form of tax. The only one that could be better is a proper land value tax.

At the other end of the scale, one that has such detrimental effects that they've not even bothered to put it into the table for they cannot believe that anyone would be stupid enough to use them, are transactions taxes. Like, for example, stamp duty on house and shares, or perhaps the financial transactions tax. Diamond and Mirlees gained their Nobels in part for pointing out how appllingly damaging this form of taxation is.

It's fairly easy for us, therefore, to judge between these different taxes. Business rates are an efficient tax, stamp duty an inefficient one. We should therefore support the rates and attempt to do away with the duty.

It is possible for those subject to business rates to claim that, for example, they put retailers at a disadvantage to internet sellers. But this is fine: we want people to economise on their use of inputs in the production of whatever. If internet retailing uses fewer inputs than traditional then we'd like to see the move from one to the other. This frees up property and capital to be used to do something else: meaning we all become richer as we have both retailing and whatever else from the same initial set of assets and capital.

This is a transcript of the speech "Ayn Rand: More Relevant Now Than Ever"  given by Lars Seier Christensen, Co-founder and CEO of Saxo Bank, at Goldmsith's Hall for the Adam Smith Institute's Ayn Rand Lecture on the 29th October 2013 

"First of all, I would like to thank The Adam Smith Institute and Eamonn Butler for having me here. I would also like to extend a big thank you to Yaron Brook and the Ayn Rand Institute for suggesting me as the speaker for the second annual Ayn Rand speech at this renowned institution. I am very proud of being offered this opportunity, and would also like to thank all of you in the audience for coming here tonight. I hope it will interest you to hear about both the positive aspects of deploying Ayn Rand in practical, day-to-day life, as well the more grim part of the speech – about a world that is on the wrong track and where change is desperately needed.

Now – I am going to start by quoting someone that anyone who knows me realizes is not my favourite politician. I consider him a very significant part of the problem we currently increasingly. But at least he did us a favour by underlining just exactly how relevant and important a voice Ayn Rand is even today, more than 30 years after her death. Let me quote the 44th president of The United States, Barack Obama, for the first and last time this year, I promise.

“Ayn Rand is one of those things that a lot of us, when we were 17 or 18 and feeling misunderstood, we’d pick up. Then, as we get older, we realize that a world in which we’re only thinking about ourselves and not thinking about anybody else, in which we’re considering the entire project of developing ourselves as more important than our relationships to other people and making sure that everybody else has opportunity – that that’s a pretty narrow vision. It’s not one that, I think, describes what’s best in America.”

Read the full speech here:

Yes, yes, I know, I become ever more tedious on this subject. Yet it still is true that if we are to believe that climate change is happening, that it is indeed something we must do about and further, that it is us causing the problem, then the answer is a carbon tax at that social cost of carbon emissions (more accurately, CO2-e).

Why?

Two-thirds of Britons are expecting to cut back on heating their home this winter, with more 25 to 34 year-olds likely to turn down the thermostat than pensioners. A new report last night claimed 32 per cent of people will "definitely" turn down the heating or switch off lights over the coming weeks in a bid to save money. A further 35 per cent will "probably" act. Some 88 per cent of households classified among those struggling with the rising cost of living fear they will have no choice but to use less gas or electricity.

Because when prices change people change their consumption habits. Given that this is what we want to happen, consumption habits to change, therefore we want to change prices.

Now I'm aware that many reject the basic layout, that there is a problem that we are causing that something should be done about. But please, let us leave that aside for a moment: think of this as a logical construct, not necessarily a description of the true world around us. Those who do accept that trio of assertions should therefore be in favour of a carbon tax. And yet that is not the consensus among those who do accept those three postulates. And for the life of me I cannot understand why. It is, after all, the main finding of the Stern Review, the very review that is waved around in support of the argument that we do have a problem that we should do something about.

All I can really come up with is the idea that people don't like something so simple as a solution. They'd prefer to witter on about an ecodammerung rather than find that there is a simple and cheap solution.

For a proper carbon tax in the UK would indeed be a cheap solution. As I've pointed out before the UK's emissions are of the order of 500 million tonnes a year. Stern says the tax should be $80 a tonne, or  perhaps £50 a tonne. £ 25 billion a year in emissions taxes. And when you add up the extra fuel duty from the escalator, landfill tax, air passenger duty and so on, we're already paying such an amount in those emissions taxes.

So, actually, we're done, finished, the UK has, as far as the Stern Review is concerned, already put into place the solution to climate change. We can declare victory and go home.

As I say the only reason I can think of that this isn't what we're doing is that there are far too many people invested in the idea that this is a complicated and difficult problem that needs their special skills and jobs to solve, rather than being one that we have already dealt with.

How wonderful to see that the terrible shortage of housing in London is being solved!

Office buildings across Mayfair, Soho and Fitzrovia are being turned back into residential homes in a bid to capitalise on rising property prices. “We have sold over 100 office buildings in Mayfair back into residential use in the past year,” said Peter Wetherell, founder of Mayfair estate agency Wetherell.

“All the period office buildings that have been used as offices for 50 years are being turned back into homes. “It’s the biggest thing going on in central London right now.” The trend has been sparked by rising property prices in the capital, with the average cost of a home in London rising 9.4pc in the year to September, and 24pc further growth forecast for 2014. “The square footage is worth a lot more for residential,” explained Mr Wetherell.

It is of course the change in relative prices which is leading to the change of use. And of course without a price system we'd not be able to determine the relative demand (and the effectiveness of that demand) for the two potential uses of the properties.

A commissar mopst certainly could (and would) decide that those properties in the most desirable area of London should only be for the use of those the commissar approved of, as happened everywhere that commissars allocated property. But even such a lauded and senior functionary would not be able to work out what they should be used for without some method of determining the relative values that the people themselves placed upon the alternative uses.

Or as Hayek pointed out, we have to have the market because it's the only thing capable of being the great calculating engine a to the value that people place on things.

Summary: Inventory build-up was a major contribution to Q3 GDP

What the chart shows: The chart shows the contribution of the change in inventories to US quarterly annualised GDP growth

Why is the chart important: US Q3 GDP growth was surprisingly strong at 2.8% (quarterly annualised rate; in the UK, we would say 0.7%). A breakdown of the numbers shows that 0.8 percentage points was due to an accelerated inventory build-up. This was almost certainly was involuntary. Over time, the contribution of inventories change to output growth tends to cancel out. While a positive contribution for three consecutive quarters or longer is not unheard of, it is rare. Bear in mind that what matters is not the absolute change in inventories, but the change in the change. In other words, a slower pace of inventory accumulation means a drag on GDP growth. The conclusion is that the current quarter and probably the next as well, will see a possibly substantial deduction from growth due to inventories.