If solar's so great why isn't.....

An interesting question being asked. If solar power is so great, if it's all just on he verge of becoming economic to use without subsidy, then why can't we see this in the prices and valuations of the companies that make solar power?

Last week, Tyler Cowen asked a good question: if solar energy is really close to dropping below the cost of conventional energy, why isn't it showing up in markets? How come solar companies (and not just thin film firms like Solyndra) getting hammered, while things at good old fossil fuels are getting better?

There are two possible answers as far as I can see. The first is of course that solar isn't about to make some great big price breakthrough, we're not all about to start using it without subsidy and essentially the whole story is a crock.

Or there's the other answer which is the one that I believe. Solar is getting better, it will cross that "profitable to use without subsidy" line pretty soon. However, the reason that the share prices of solar manufacturing companies are not soaring in anticipation is because share prices don't in fact measure sales. Or consumers' use of the company's products, not boiling Gaia or even prices falling into viability. What share prices measure is future profits.

And I'm deeply suspicious that anyone is going to make large profits by manufacturing solar cells. There's just too many people in the business: and it's not even that complicated a business either. We're actually seeing something approaching a properly competitive market in fact.

In order to make solar cells more cheaply a producer has to get cheaper sand, cheaper energy, use less energy in the process (it is essentially baking beach sand in order to get the silicon), slice the ingots more thinly or finally, just be better at the boring manufacturing stuff. Fewer faults, less labour being used, all that sort of stuff. And the problem from the manufacturer's point of view is that there's no particular point at which they can claim unique intellectual property, a patent, or any real protection for their ideas or processes. It's not like a computer chip where you can copyright (at the least) the coding in or anything.

Solar cell manufacturing is, for all its newness and gadgetry, really just mass manufacturing of entirely interchangeable parts. As such we really wouldn't expect those doing it to make good or large profits over the long term: we'd expect profits to be competed away down to the average return on capital in fact.

As, in fact, we can see is happening as the things get 4 to 5% cheaper every quarter. So the reason we don't see solar stocks soaring as a result of the price competition bringing them closer to economic viability is, umm, the price competition bringing them closer to economic viability.


Bank reform: getting the policy right


Create new, 'safe' banks if you want to – but not at the cost of lots more regulation and dismembering Britain's hugely important financial services sector. That's the message of a new report and briefing paper being published by the Adam Smith Institute today.

The Independent Commission on Banking (ICB) – set up by George Osborne – was told to work out ways to make the banks more secure and avert future banking crises. Their first suggestion was to split up the banks into 'safe' high-street and 'risky' investment operations. Then load them with higher reserve requirements, so they have to keep a bigger cushion of 'safe' assets.

Both prescriptions are wrong. It wasn't the 'risky' investment banks that caused the UK's problems. It was the retail banks and building societies that got into trouble, mostly by lending too much on mortgages during the housing boom, or buying US investments that they did not understand. When the boom subsided, their customers couldn't repay their mortgages and the US investments turned out to be highly toxic. Regulators daydreamed while this was all happening, and the Bank of England – having fuelled the boom – squeezed hard just when the banks needed more cash to tide them through this rough patch. The retail banks just ran out of money.

So breaking up the banks isn't going to make any difference. And raising their capital requirements higher than anything being contemplated by Brussels or Basel will just put them at a huge disadvantage against world competition. It also means they will have less cash lying around to lend to small firms – the drivers of employment and growth in the UK. Small firms will find it harder to get loans, and will pay more for them.

Investment-bank customers are savvy enough to look out for themselves, but ordinary families and businesses want banks that are safe. So, instead of trying to dismember existing banks, why don't we simply allow people to create new ones? We suggest a new form of banking licence that allows people to create Trust Banks to do just that. They could operate as they pleased, but the Bank of England would have to be sure that they were sound, and could survive the failure of any parent or sibling company. And Trust Bank customers would be the only ones who would get a government guarantee that they would not lose their deposits. It's a market solution to a problem caused by over-complex regulation, badly enforced.


Beware the politicized medical establishment

As I've said before, politically active doctors are the most immediate threat to personal liberty in Britain. Now today the British Medical Association (in the name of "no platform for fascists", I won't link to their website) want to ban smoking in cars:

The British Medical Association (BMA) is urging ministers across the UK to extend the ban on smoking in public places introduced in 2007 to all vehicles in a further effort to protect people's health.

Children are at particular risk from secondhand smoke in cars because they take in more of the chemicals from cigarettes than adults and may not be able to refuse to travel in a smoky car.

Ah, the Helen Lovejoy argument: won't somebody think of the children?? Of course, if they really believed that rationale, they'd want to ban children from cars altogether. Or, better yet, why not ban cars? A tweeter has an ideal solution:

Let's ban parents! They regularly neglect, abuse & murder their children. I say this menace must be stopped!

Well, quite. Chris Snowdon has the low-down on the figures used by the BMA to justify this piece of health fascism. Basically, they're made-up. And Joshua Lachkovic has written a good broadside against the proposals at the TFA website. But I can't help but wonder if this is a tactical move by the BMA. The best way to shift the centre ground to where you want it might be to take an outrageous, extreme position, so that your true goal seems moderate. Shoot for the stars and you may just reach the moon.

My theory is that this ludicrous proposal is designed to make a politically achievable target seem moderate. The BMA wants plain packaging laws for cigarettes to be brought in, and today's furore will only distracts civil liberties campaigners from that objective. Clever stuff; though I might be giving them too much credit. Maybe they really are what they seem: anti-individual, anti-liberal, anti-choice paternalists who think that nanny knows best.

I wrote about plain packaging laws earlier this week: Plain packaging laws are stupid and illiberal.


We need to cut inflation down to size

Yesterday's inflation figures showed that the Consumer Price Index (CPI) measure of inflation in October dropped slightly to 5%, from 5.2% last month. CPI is the government's preferred measure, which does not take housing costs, such as mortgage repayments, into account. But those of us who still have mortgages to pay off might prefer to look at the more traditional Retail Price Index (RPI), which is even higher at 5.4%, down from 5.6%.

The Bank of England reckons that inflation is largely an effect of the falling pound, which makes imports more expensive, particularly the things it is hard to do without, such as fuel and food, which are largely imported. It is not helped by rising commodity prices as Asian countries bounce back from the slowdown and start building things again. They figure these pressure will ease, and when the VAT rise drops out of the calculations after it has been in place a year, the indexes will fall again, they say.

Well, they would say that, wouldn't they? It rather diverts attention from the £75bn of new money which the Bank 'printed' (in the form of Quantitative Easing) before expanding the programme to £200bn later that year and increasing it again recently to £275bn. And as we know, thanks to Milton Friedman, inflation is always and everywhere a monetary phenomenon. When you print too much money, it loses its worth.

So is that what is going on here? It's hard to say. The other folk who create money are the banks. Indeed, they can create it at the stroke of a pen, just by giving loans to their customers. The trouble for lots of their customers is that the banks have been more reluctant to do that recently, having had their fingers burnt by the crisis of 2007/8. So the Bank of England figures it is just replacing the money that the banks are no longer creating.

Maybe. For quite a long time through the noughties, the Bank had a target of 2% inflation which it failed to meet, month after month. And that was despite the fact that a strong pound and cheap imports from the likes of China meant that, if anything, prices should have been falling. The Bank stoked up a boom, and it was the inevitable bust of that boom that led to our present problems.

Yes, we need an big enough quantity of money around the place that banks and businesses have enough to lubricate the wheels of commerce. But you don't want to take risks with inflation. it is corrosive. When all prices are rising, it becomes harder to distinguish the 'signal' of real price rises and falls from the 'noise' of prices rising everywhere. How many people really know whether their house has gained or lost value, when the cost of living is rising so fast? How many entrepreneurs, for that matter, know if their investments are really paying off, after inflation is taken into account? They don't – and that is why inflation causes people to put their time, effort and money into the wrong things. That's a luxury we really can't afford in these times. We need to get inflation down. And fast.


Cocaine, crack and crime

There's a fascinating post on The Atlantic Cities blog today, which argues that the spectacular drop in crime the US enjoyed during the 1990s was down to a fall in the price of cocaine (and, therefore, the highly-addictive crack cocaine):

Cocaine was the driving force behind the majority of drug-related violence throughout the 1980s and into the early 1990s. It was the main target of the federal War on Drugs and was the highest profit drug trade overall. In 1988, the American cocaine market was valued at almost $140 billion dollars, over 2 percent of U.S. GDP. The violence that surrounded its distribution and sale pushed the murder rate to its highest point in America's history (between 8-10 per 100,000 residents from 1981-1991), turned economically impoverished cities like Baltimore, Detroit, Trenton and Gary, Indiana, into international murder capitals, and made America the most violent industrialized nation in the world.

Then in 1994, the crime rate dropped off a cliff. The number of homicides would plummet drastically, dropping almost 50 percent in less than ten years. The same would go for every garden variety of violent crime on down to petty theft. The same year as the sharp decline in crime, cocaine prices hit an all-time low. According to the DEA's System to Retrieve Information on Drug Evidence (STRIDE) data, the price per gram of cocaine bottomed out in 1994 at around $147 (calculated in 2003 dollars), the lowest it had been since statistics became available.

The Atlantic says that this drop in price is down to more sophisticated smuggling techniques, which increased supply. Of course, correlation isn't causation etc. But it sounds like a plausible explanation – reduced margins for dealers means the risks of jail or death from turf wars (the main source of drug gang-related murders) has less of a pay-off. The emergence of crystal meth (very low-cost to produce) probably hit demand for cocaine too.

The other side of all this, which I'm surprised the article doesn't mention, is that lower costs mean that addicts find it easier to pay for their habit. They're less likely to resort to theft and mugging, and so on. It's also noteworthy that crack probably only emerged as a way to get more "bang for the buck" out of cocaine while trafficking was harder. 

The upshot of all this is that reducing the price of drugs like cocaine in Britain would probably help with crime rates as well. Drug legalization would be ideal, but a more achievable work-around might be to instruct customs workers to turn a blind eye or take a coffee break when flights from Colombia are coming in to Heathrow. They do it for European countries already, where there are seldom-enforced limits on how much alcohol or tobacco can be brought in. Extending the practice to one more country could make a surprisingly positive difference to the UK's crime rates. 


Milton Friedman - libertarian or statist?

miltonThe US Nobel economist Milton Friedman was one of the most effective critics of big government of his time – mainly, the second half of the twentieth century. But this week I found myself at a meeting of the Libertarian Alliance, having to defend him against charges of statism.

Friedman thought of himself as a liberal rather than a libertarian, and 'the consistent liberal,' he once argued, 'is not an anarchist.' Human beings are not angels, in his view, so they need government to restrain them. He thought government had a wide role – to maintain law and order, dispense justice, define the rules of property, promote competition, maintain sound money, and protect the destitute. Equally, he believed that governments were too big, to avaricious, too centralised, too bloated, and far too likely to fail in anything they took on.

He is known, of course, for his work on money and inflation. But he did not propose, as Hayek did, competition in currency production. He thought the reality of our times is that governments are in control of the money supply, so the question is simply how to sustain them. He thought a gold standard impractical – inevitably, rather than using the metal itself as money, people would use paper (or electronic) receipts for it, so you have the same problem of potential over-printing of that paper as you do today. So he thought the best thing was to have a monetary rule, preventing politicians from over-producing the paper money we have today.

On regulation he was much more libertarian, calling for an end to rent controls, the mail monopoly, wage and price restrictions and even state licensing of doctors and lawyers. On the other hand he did support the registration of certain professions, like taxi drivers, who could cheat the public if they could not be easily identified.

He did not believe in compulsory schooling, nor in state-run universities, but supported a state-led voucher system for education. He would replace the state pension system – but with one of obligatory saving into personal accounts.

You could say, then, that Friedman simply accepted some of the political realities of his age – though he always urged economists to think radically and he himself pushed the boundaries of what was taken for granted. To him, the state was no more than a tool for the use of individuals, who necessarily had priority. It was why he pointedly – and successfully – opposed the military draft, and argued that drugs should be decriminalised. In terms of advancing the libertarian agenda, few people in recent times have done more.


Plain packaging laws are stupid and illiberal


Most puritans have been put sharply on the defensive in recent years. Drug prohibitionists may finally be losing their war, and campaigns like the government’s Talk To Frank, which helpfully gives the going street value of common drugs among other things, suggest that the cultural war is already won. Anti-sex campaigners must be even more depressed about how things are going, although to be fair they must be fighting the most unwinnable war in human history. On both counts, personal responsibility and liberalism seem to be winning over social conservatism. Thank god for that.

It’s strange, then, that anti-smoking campaigners seem to be advancing dramatically across the world. The indoor smoking ban, which besides being fundamentally illiberal is also putting half the British pub industry out of business, is now lauded by human weather-vane David Cameron, who used to oppose it. And now Australia has become the first country to introduce a “plain-packaging” law. Basically, it means that cigarettes will now have to be sold in plain white boxes with big health warnings on them and no logos. The plans are monumentally stupid. And, unsurprisingly, anti-smoking groups want to bring them here.

The laws are deeply illiberal. Arguments for the smoking ban to protect pub staff from second-hand smoke were unconvincing and weak, but at least made from a position of protecting third parties from smokers. Plain packaging laws do nothing of the sort; they simply treats adults like children by making "bad things" less shiny. The government should have no place in trying to change what adults do in their private lives if it only concerns them and other consenting adults – that is the essence of liberalism. That there is even a discussion of how to interfere in adults' lives like this to make them "better" should be chilling to anybody who considers herself a liberal.

I don’t expect anti-smoking campaigners to care about individual rights and personal liberties. These are basically irrelevant to them, because they see most of the adult population as bleating livestock who need to be controlled by "experts" for their own good.

What these anti-liberals should care about are the unintended consequences of their actions. What plain packaging laws will do is, essentially, empower counterfeit cigarette sellers by removing their biggest hurdle – replicating the designs on cigarette boxes. Currently, a fake pack of cigarettes is pretty easy to spot because of the shoddy quality of the box. If this is made uniformly plain across cigarette packets, it becomes much easier for people to pass fake counterfeits off as the real thing. And more people will be inclined to buy fakes knowingly as well – whatever social sanctioning there is against people smoking dud cigarettes will evaporate once the prestige of smoking a good brand is removed.

That means that fraud is easier; that money goes to criminal gangs instead of tobacco company shareholders; and that smokers’ health is endangered even more because of the shortcuts taken by cigarette counterfeiters. I don’t care if someone wants to smoke crappy Chinese-made cigarettes, but they had better be aware of their choices.

Australia has never been known for being a particularly liberal place, but it’s a great shame that anti-smoking paternalists are so powerful in Britain too, where there is a long tradition of liberalism. Adults should be allowed to be adults, without interference from the state. It is sad that this even has to be said. There are compelling consequentialist arguments against plain packaging, but in a free society they shouldn’t have to be made at all.

Edit: Angry Exile gives an interesting correction in the comments:

A slight correction from an expat Down Under. They're not going to be plain white boxes but plain olive, a colour the Health Minister tells us has been determined by trick cyclists as psychologically the most unattractive to smokers (yes, really), and with the obligatory big death cancer horror picture in the middle - example of one proposed design here.


Déjà vu all over again

To folks of a certain age, the world is eerily familiar to the 1970s. Those were depressing times, especially for normally upbeat and optimistic types like us aficionados of the Adam Smith Institute.

Consider the broader international economy. Back then, double-digit central bank interest rates were widespread. Now, rates of virtually zero are equally disquieting. Stock markets went nowhere in the 1970s, just as they’ve done for 12 years now. The IMF bailed out ancient European nations in the 1970s (the UK in 1976 and Greece in 1987) and is at it again now.

America was licking its wounds then after an expensive foreign war (Vietnam) which it fought with no restraint on domestic spending (The Great Society). This time around, it was Iraq and Afghanistan when there was no pretence of budget discipline elsewhere.

In the Middle East, the 1973 Arab-Israeli war and the 1979 Iranian revolution echo now in Gaza and the Arab Spring. A quadrupling of oil prices then looks familiar now when we fill up our tanks. In the Far East, Japan was rocketing to economic superpower status, laying waste to industry after industry in the west, much like China is doing now.

We had terrorists then - the IRA, the Red Brigade and its imitators. Now we have Al-Qaeda and its imitators. Street demonstrations and protests abounded in the 1970s but they seemed more threatening than those in their spiffy tents now around St. Paul’s. Global cooling was the big worry back then but we’ve moved on to global warming now.

In America, the earnest outsider Jimmy Carter was elected President in 1976, not unlike Barack Obama 32 years later. Here in the UK, Jim Callahan’s brief reign in the late 70s was reprised by Gordon Brown – both unelected prime ministers chucked out of office after stepping up from the Treasury to succeed the more charismatic Harold Wilson and Tony Blair.

So be of stout heart. Eventually, fiscal rectitude, open markets, transparent democracy and faith in the individual pulled us back from one brink and can do so again.

Indeed, those basic principles now go mostly unchallenged, at least in word if not deed. Back in the 1970s, that wasn’t the case. The Soviet Union was on the march: meddling in Angola and Nicaragua, invading Afghanistan and bullying in Europe. China’s Gang of Four was rampant. Communists in Italy took 34% of the vote in 1976 while the French Communists took 22% in 1973. Remember Militant Tendency?

The ASI was founded in those bleak 1970s to enunciate, defend and advance free market and libertarian principles. The challenge then was to repel the barbarians at the gate; the challenge now is to defend and refresh the faith.


Price competition and price discrimination

I thought this was a fascinating observation so I'll try and recast it into the UK situation.

Imagine a mid level supermarket, say, a Waitrose. Imagine then that a cheapy cheapy place opens next door, say an Iceland or a Lidl.

Imagining? Good, now, what happens to the prices in the Waitrose? Do they rise or fall?

Ah, yes, we've our old correct answer in economics again, "it depends".

If that Waitrose faced no competition, or very little competition, then pries would fall as the introduction of competition would mean they have to cut margins in order to retain much of their custom.

However, if the market was in general competitive to start with, then the Waitrose (please note, these names are indicative, just to set the scene, not descriptions of actual stores) would have already pared margins to retain custom. It would be doing its best to appeal to both the high income groups and the price motivated shoppers. Then in comes the determinedly low cost store: they're going to suck away those price conscious people almost whatever the Waitrose does. There just isn't much point in trying to cut pries to meet them. In which case the Waitrose prices might actually rise: better to make higher margins off the high income groups (who wouldn't be seen dead in an Iceland after all, they use that common girl in their ads) and accept the loss of the price driven shoppers.

I think that's a very nice little demonstration of that most important answer in economics. What happens when something changes really does depend, depends upon reactions to it, what the initial set up was and so on.

Do note though that despite the Waitrose prices rising, shoppers themselves are better off. Those who willingly pay the higher prices are clearly willing to do so in order to not have to shop with Ms. Katona, those willing to chase prices are clearly made better off by being able to do so. And we are, after all, trying to get this whole game operating in favour of the consumers.


Competitive markets in action

This little snippet from City AM does not show what the journalist thinks it shows:

Admiral had outperformed the market with an unbroken run of profit increases since going public seven years ago, based on its ability to avoid high-risk drivers, but yesterday it said growth in its pre-tax surplus could be limited to 10 per cent this year.

The Cardiff firm, which also owns comparison website Confused.com, blamed a level of injury claims “above historical levels of experience” in the three months to the end of September. Analysts had expected profits to rise 21 per cent to £324m.

Motor insurers have paid out more in claims than they received in premiums every year since 1994, according to the Association of British Insurers, as claims filed by “no win, no fee” lawyers have increased.

I'm sure that lawyers haven't helped. But that an insurance company has paid out more than it has earned in premiums isn't proof of that contention. For an insurance company, paying out more than is received in dividends is simply proof of operating in a competitive market. Indeed, if they weren't doing this we would find that to be prima facie evidence that the market for insurance was uncompetitive.

The reason is this: there are two income streams for an insurance company. The first is premiums in and claims out, yes. However, the premiums come in in advance, the claims go out on an historical basis. So the insurance company has all of that money, that float, the accumulated premiums which haven't turned into claims yet, to go and play with. And play with them they do: insurance companies are one of the largest players in the investment markets. The profits to be made from those investments are the second income stream and they are, in a competitive market for insurance, what keeps people running insurance companies even as they lose money on the actual underwriting.

There is a way of looking at the insurance business which makes this even more evident. The insurance side is just a way to get that float with which one can go and play investments. This is at the heart of Warren Buffett's success: yes he's a very good investor, very good investor indeed. But he didn't invest the couple of million dollars he had and turn it into $50 billion. He took his couple of million and bought an insurance company and then he used the float of the insurance company to make $50 billion.