Just to remind - there is no market for more gilts, more government borrowing
Just to pick a specific instance of something incorrect oft said:
Up and up goes the national debt, but still there seems to be no shortage of investor appetite for UK gilts.
This is not true. The Household Analogy holds for governments just as it does for households.
There’s a very distinct shortage of investor appetite for UK gilts. This is also trivially easy to prove.
Just using very round numbers the outstanding issues are some £2.7 trillion. For which there is such little appetite that the Bank of England has had to invent money to buy £700 billion of them (about the current QE stock). So, the current market won’t even absorb 25% of what is already in existence. That’s not evidence of no shortage of investor appetite.
If the BoE were to try to sell that 25%, that £700 billion, it would drive prices down and yields up. Indeed, we all expect the BoE to try to sell some portion at least of that QE gilts stock in order to drive prices down and yields up at some point.
So, OK, at current prices then there’s a shortage of investor appetite for gilts. But then that’s always true, isn’t it? We don’t have shortages of things, we have shortages at a price. At current prices there’s a shortage of investor appetite - about £700 billion’s worth in fact. QE is QED.
Which is why the household analogy does work. Sure, sure, governments can just print and all that. But they still face price limitations on credit just like anyone and everyone else - even households.
Tim Worstall
As ever, planners fail the reverse Chesterton’s
Chesterton’s Fence is the idea that before tearing down a fence it’s worth working out why it was built. For only if you know why it was can you work out whether the reason for it is still valid - or not. The Reverse Chesterton’s is to ask why something doesn’t exist before deciding to create it. It may be - may - that there’s a good reason it doesn’t exist.
So to this idea of food deserts. Places where there just aren’t the shops with the good, fresh, food that we should all be righteously eating.
Over the past decade, state and federal governments have invested millions of dollars in creating grocery stores in food deserts — defined by the U.S. Department of Agriculture as any low-income urban neighborhoods without a grocery store within a mile, and any rural communities without one within 10 miles. These programs continue to expand.
But the Reverse Chesterton’s was never grappled with properly. Vague claims that profit seeking grocery chains just wouldn’t do it therefore….
Many stores that receive subsidies shutter their doors soon after opening or fail to open at all. Capitol News Illinois and ProPublica examined 24 stores across 18 states, each of them either newly established, preparing to open or less than five years old when they received funding through the federal USDA Healthy Food Financing Initiative in 2020 and 2021. As of June, five of these stores had already ceased operations; another six have yet to open, citing a variety of challenges including difficulties finding a suitable location and limited access to capital.
Illinois’ record is similarly disappointing. In 2018, Illinois officials highlighted the opening of six grocery stores that had received startup funds over several years from a $13.5 million grocery initiative of former Gov. Pat Quinn’s. Four of them have closed.
Not enough attention was paid to why profit seeking companies wouldn’t open stores. For the answer is that profit is the value added to the resources needed to open a store. These stores continually make losses - they’re not adding value. Which is why the profit seeking companies wouldn’t and didn’t open them.
The reason the stores didn’t exist, the reason they go bust when they do, is that there’s no good reason to have food stores in such places.
Asking the right questions before doing something - why is it that planners never do bother to do that?
Tim Worstall
The ASI and the Overton Window
The Adam Smith Institute saw another big policy win this week. In 2017 we published a paper by the ASI President, Dr Madsen Pirie, entitled ‘The Fifth Way.’
It proposed the radical idea that local governments should be empowered to buy farmland, give it planning permission for housebuilding, and share the proceeds with the community. The government has just announced that it will implement this.
It is another case of the ASI stretching the Overton Window so that ideas thought outlandish can be brought into the range of what it is possible to consider. Way back in the 1980s Madsen was quoted as saying, "We propose things which people regard as being on the edge of lunacy. The next thing you know, they're on the edge of policy." If we had a penny for every time that has been quoted, the ASI would be rich. We are not rich, alas, because we never received those pennies.
It does, nonetheless, indicate one of the ASI’s greatest strengths. We seem to come up with ideas that seem way beyond what is considered reasonable, and then market them in such a way that they become worthy of consideration. This has happened many, many times, and ‘The Fifth Way’ is only the latest.
Madsen has been working on a paper that proposes radical solutions to ongoing problems in most areas of government ranging through health, education, student loans and overseas development. It’s Overton window stuff and is guaranteed to blow your socks off when we publish it next month. Watch this space.
Government hallucinates just as badly as AI does
The current worry de jour over artificial intelligance is that it hallucinates. This is the process whereby an AI (or an LLM to be more accurate) trains on the output of other AIs (or LLMs). Given that there’s no logic or fact check on the output of the earlier models then the input into the later wanders somewhat from reality. Therefore, however clever the workings of the model itself we get GIGO -garbage in and garbage out.
What is less appreciated is that government works the same way. We have, for example, an entire political class that has forgotten its own definition of poverty. Which is living in a household on less than 60% of median household income, adjusted for household size (which can be measured before or after housing costs). This is a measure of inequality, not poverty.
Of course, it’s entirely possible to worry about inequality, not that we here do very much. But it is something different from poverty. The difference between having two pairs of trainers like the lad next door and having no shoes like no one in the country sort of difference.
But because of the insistence on not recalling the definition in use we’ve half the political class insisting we must solve child poverty - something we’ve already solved, many decades back. There is still that child income inequality, if that’s something we want to worry about, but that is a different thing.
Or, today’s example:
But the city that birthed Greggs has now gone to war on unhealthy food, bringing in an ambitious ban on new takeaway and fast food openings in a desperate bid to combat soaring obesity rates.
It follows complaints that fast food chains and takeaways have effectively colonised poorer areas of the city, creating so-called “food swamps” where access to healthy, nutritious meals is nearly impossible, driving generations of children and families into ill-health.
New takeaways have been outlawed in any ward where more than 10pc of children aged 10 to 11 are obese. Starkly, that leaves all but two. It follows a similar move in neighbouring Gateshead, which has banned new takeaways since 2015.
The first problem is the lack of thinking in this iteration of the model. The complaint is that there are lots of fast food shops. OK, so that means that it’s a low margin business - lots of competition does that, destroys profit margins. Now, why would a low margin business cluster in the low rent areas of the city? Anyone? Bueller?
Ah, good, so that’s obvious after 30 seconds of thought. OK, if a local councillor, perhaps 5 minutes thought.
But it’s worse than this. Consider their measure in use there, that counting of child obesity. As Chris Snowdon has been shouting for many a year the numbers are an entire fabrication. The input into this model is an entirely made up - and wrong - output from an earlier incorrect model. This isn’t going to work you know.
As with the worries over AI and LLMs. If the input to this iteration of the model is going to be the incorrect output of the last then government is going to end up hallucinating. We end up being GOSPLAN’d as pointed out elsewhere:
For exactly the same reason too - there’s no looking out the window at reality going on to error check the inputs to the next set of output generation. Which is exactly what happened at GOSPLAN of course. The Five Year Plan said that tractor production would rise 50%. As the Five Year Plan was over-fulfilled - as they always were - then that meant that there were more than 50% more tractors. Therefore Kazakhstan could all be planted with wheat despite everyone in Kazakhstan awaiting a horse let alone a tractor. The Plan then insists that as all Kazakhstan is now planted with wheat there is enough bread for all and so the system collapses - for no one did count the tractors nor even ask the wife about the queue at the bread shop.
Now of course GOSPLAN was extreme and we’re not - aha, aha, aha - doing anything so damn stupid. Except, of course, we are.
At which point the only interesting question is how do we get them to stop doing this? Our own answer tends to simply having less government so that there’s less for them to go mad about.
Tim Worstall
The effect of shipping upon inflation
We do tend to think that this is a really bad idea.
Weber has highlighted the case of shipping companies, which profited from a jump in the demand for goods, including medical supplies, during the pandemic. Can it be true that the only way to overcome a rise in shipping costs when the next crisis hits will be to increase the number of container ships, even though that will take years and no government is going to build them and park them in a port ready for an emergency?
She reckons shipping costs added a full two percentage points to inflation between 2021 and 2022. Surely the solution is for governments to take a large slice of the profits and use it to subsidise prices?
There was indeed a jump in shipping costs. 500%, 600%, that sort of level to get a container across the oceans. As the source itself, an IMF paper, says:
The pandemic spike in shipping costs is more than a year behind us, and our research suggests that we should already have seen most of its inflationary impact by now. Our estimates, moreover, are symmetric, such that declines in shipping costs would tend to bring inflation down in the following year. The implication is for the big moderation in shipping costs in 2022 to contribute to a reversal of inflationary pressures.
Things change, prices change, then things get back to normal as the effect of price changes work through the system. Sounds pretty good to us. In fact that looks like the price system working to us.
At which point the suggestion is to cripple the price system by confiscating righteously earned profits and using them to subsidise. Which is, as we say, something we think is a really bad idea. If we’ve a system that works then why wouldn’t we allow it to, well, umm, work?
Those excess profits being why it does work of course. For the increase in shipping capacity comes not from people launching new ships - takes two to three years from ordering a new one to being able to sail it away. It comes from owners not scrapping old and inefficient ships. Things that are no longer profitable to sail or charter because it’s being outcompeted by newer, larger, more efficient shipping stock. But which can indeed still run for another few years if only the price of shipping rises. Therefore it becomes the scrap yards that are empty as that old stock is run for a little longer thereby increasing shipping capacity and bringing shipping costs right back down again. This is such a well known feature of the market that even the European Union has noted it (last para, page 2).
As ever, the cure for high prices is high prices. Yet the suggestion is that we should short circuit the very process that makes this work? As we say, a very bad idea indeed.
Tim Worstall
Yes, of course mistakes happen
There are, as all of us with ageing body parts know, times when things go wrong. There are those who suggest that if only we got all the clever people into government and had them handle it there would be fewer of those things that go wrong.
They could be right of course:
A ship due to be delivered to Scotland’s state-controlled ferry operator will arrive months late, adding to a capacity crisis that threatens to cut off island communities.
The MV Isle of Islay had been scheduled to arrive with CalMac in mid-October but will now be delivered at the end of the year amid a steel and labour shortage at the Turkish shipyard where it is being built.
Contracting out to the private sector. Tsk, months late, the winter sailing schedule will be disrupted. Obviously, we should have a mission specific plan with strict conditionality in order to remedy matters. In fact everything should be run that way because, clearly, that private sector just cannot cope:
The development comes as a fresh blow to the SNP as two other vessels being produced by a nationalised Scottish shipyard run six years behind schedule and £250m over budget.
Ah, you mean that direct government involvement is worse? Possibly 24 times worse, the difference between 3 months and 6 years late?
Well, we do live in a world of the second best, the task being to find the least bad method, the least bad solution. The least bad apparently not being mission specific government plans with strict conditionality.
Odd that the idea’s currently so popular really.
Tim Worstall
British understatement
Concerning plans to impose censorship upon the internet the claim is made that:
However, critics have said the proposals expose “the sinister and authoritarian side” of Sir Keir’s Labour Party, driving “a coach and horses” through the principle of free speech.
The particular proposal is:
The Telegraph understands that ministers are looking at introducing a duty on social media companies to restrict “legal but harmful” content.
It could mean that firms are required to remove or suppress posts spreading fake news about asylum seekers or other topics such as self-harm, even if they do not meet the threshold for illegality.
It is suppression of free speech. It is censorship. To merely say that it is is an understatement.
A “legal but harmful” clause, requiring firms to take down or restrict the visibility of content deemed to be dangerous but not against the law, was included in the original Bill brought forward by the Tories in 2022.
However, it was removed because of free-speech concerns, with critics warning it could allow a future Labour government to censor controversial material.
Slippery slope arguments are sometimes to often logically invalid. The slope must exist rather than merely be claimed. But if government takes unto itself the power to determine what we may say - other than the usual restrictions upon incitement to immediate violence - then that slope really is there. For we will end up with it being illegal to question the tractor production statistics. The slope being that politics simply will exercise any such powers that it takes unto itself.
It’s entirely true that some exercises of free speech can be harmful. But not having the free speech is greatly more so, viciously more harmful.
No, this is a terrible idea.
Quite apart from anything else how can a government serve a population if the government doesn’t know what the population is saying?
Tim Worstall
No, this is not a good idea
It’s possible that there are good adjustments that can be made to inheritance and capital gains taxes - abolishing them might be a starting point for discussion - and also possible that there are bad ones. This is a bad one:
“There are some reliefs I think there is a very good case for getting rid of,” Adam says.
If someone buys an asset that appreciates significantly during their lifetime, they can for example pass it on to their heirs. The person inheriting it is then only liable for any price gains since they inherited it.
“That is a particularly silly and damaging feature of the system,” Adam says.
“I think there is something to be said for bringing rates of tax on capital gains more into alignment with income,” he says.
To turn to an actual example that one of us knows about. An estate that will be subject to inheritance tax when that dismal day - hopefully long delayed - arrives. Upon which the suggestion is that CGT is at income tax rates and IHT is also payable.
Within that estate is a position in what used to be Vibroplant. Actually a founding shareholder for a couple of hundred quid or so. That’s how the company started in fact, a whip ‘round among Northern professional engineering types a generation or two back.
At valuation date for IHT the value of that stake (whatever it is, no, not known) will be “stepped up” to current market value not original purchase price. Then taxed at 40%. That’s what this “step up basis” is, that death is a crystalising moment for previous capital gains. Having paid 40% then the starting point for any inheritors is the market value that has already been taxed. Which seems fair enough.
The new proposal is that the 40% is taken then on top of that a 45% CGT on the capital gain itself. Which seems more than a little punitive. Note also that no one is suggesting the return of an indexation allowance so that two taxes are charged on 60 years of inflation, not just real rises in value.
We’d suggest that this is, actually, not a good idea. In fact we’d suggest that it’s a very bad one. 80% taxes and more on productive investments in the British economy would have something of a dampening effect upon productive investments in the British economy, no?
You know, the first rule of economics, incentives matter?
Tim Worstall
Yes, yes, whinge away about the whinging on taxes to be paid - then consider the actual point.
The Royal Mint and the problem with recycling
News that the Royal Mint it to process mobile phones for their gold content:
The Royal Mint has unveiled a “pioneering” factory that will recover gold from electronic waste, creating a more sustainable source of the precious metal for the coin manufacturer’s luxury jewellery line.
The factory in south Wales, which has been under construction since March 2022, is designed to extract gold from up to 4,000 tonnes a year of circuit boards sourced in the UK from electronics including phones, laptops and TVs.
This isn’t wholly new of course. One of us worked on such programmes back in the 1990s when there was a lot more gold in them thar hills of electronics. But this is not to sneer or anything (the “new” is what looks like an interestingly useful new process to do it) but to use it as an example to explain the recycling problem:
It is estimated that about 600 mobile phones will have to be processed to create one of the 7.5g gold rings sold in the 886 collection, which are similar to the weight of a £1 coin.
There will also be a little tin from the solder, copper from the circuit boards and so on but the vast, vast, majority of the revenue will come from the gold. And that’s worth, well, maybe £1 per ‘phone? If there are tens of millions of old phones per year (sounds about right) then that’s money to be thought about, obviously.
But the processing of the ‘phone (or other electronics) isn’t the major cost here. It’s the collection of the ‘phones. And this is always true of any recycling process.
It often is true that a pile of 10,000 tonnes of something (or 10 million pieces etc) is worth feeding into a factory to recycle out the minerals and or metals. But also that creating the pile of 10,000 tonnes (or 10 million etc) costs vastly more than the value of those metals.
For example, the Royal Mint will not give you 50p for that old ‘phone at the back of the third drawer down. But might well be prepared to offer 50p each for 10,000 pieces delivered their plant (No, we don’t know but the logic is obvious, yes?).
Which is why recycling schemes always need to concentrate on the major cost to them - the collection into the pile at the factory of the things to be recycled. Not doing so is why EU regulations (gold plated here at home of course) killed the extant lead acid battery recycling scheme. The costs of collection were such that the £5 of lead in each one was only worth 50p at the garage when picked up. Regulation started to insist on a £25 document for the movement of used lead acid batteries. That kills the economics even though the factory to do the processing existed and was, in fact, gasping for stock (the Chief Buyer for that factory was met by one of us at a conference in Russia in fact, so far he had to go to try to replace his feedstock).
As we’ve said many a time we’ve absolutely delighted when people do economic recycling. It makes us all as a society richer. But the economic part of it has to concentrate on the collection costs because that’s where all the major costs are.
Tim Worstall
We’re really not sure why MMT has such difficulty understanding QT
Apologies for the use of Professor Richard J Murphy again but he does provide such useful straight lines:
….I can see no policy reason why quantitative tightening has been done.
Professor Murphy is indeed one of the UK’s leading Modern Monetary Theory advocates and theorists. He was much in evidence when Jeremy Corbyn started touting the Magic Money Tree for example.
OK, we know what that is, monetisation of fiscal policy and it’s in all the textbooks as such - along with the appropriate warnings about it.
MMT does say some true things. A government can just print money and spend it. This is entirely true - monetisation of fiscal policy. As long as there are unused real resources this could be beneficial to the economy too. We would argue, strongly, that it does matter which resources and what the money’s spent upon but leave that as a detail for now. We are, for example, unconvinced that massive such spending will make every dole bludger employed while it might soak up an amount of involuntary unemployment.
MMT also says that this policy faces a limitation. Excess money printing and spending will cause inflation. The arrival of the inflation can even be taken as an indication that the money supply is now excess.
OK.
So, when money supply is excess then that money supply needs to be reduced in order to reduce or get rid of the inflation. It’s usually proposed that higher taxation should be that method. The government taxes more, doesn’t spend the greater revenue but just cancels the money collected and inflation reduces.
A fun point that can be made at this point is that MMT is really very monetarist. The money supply is a major, if not the major, determinant of the inflation rate. Therefore the money supply needs to be managed with the inflation rate in mind. How very different the two ideas are, eh?
So, we had lots of that money printing, Quantitative Easing, during Covid, that money was spent into the economy, we got inflation. Therefore we need to reduce the money supply.
We could, obviously, try taxing that money back and government runs a surplus to destroy that money received. But that’s got a certain political difficulty to it. The BoE intends to QT perhaps £100 billion this year. That’s, umm, quite a lot actually. About the total revenue from Corporation Tax and it’s difficult to imagine anyone sentient deciding to double that for a year. Or, an alternative, putting VAT up to 32% (from the Worstall Caculator, Pencil, 1, Back of Envelope, 1). Or raising national insurance by 50% and so on. No, the rich do not have enough money that only taxing them will solve this problem.
Back to MMT - print the money and if there’s inflation then too much has been printed and some must be called back in. We need to do £100 billion, taxes can’t do that, so Quantitative Tightening is the other way of destroying that excess money. We don’t see this as a difficult explanation. We also don’t see - quite the opposite in fact, we’ve bent over to make it consistent with - the standard MMT description of how the economy works.
We need to destroy the excess money, tax can’t do it, therefore QT. Shrug.
Now all that’s left is to wonder why MMT enthusiasts, even experts, can’t grasp it.
Tim Worstall