Trade Camilla, it's called trade

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Camilla Cavendish employs the following arguments urging that we really should do something to start building our own renewable energy systems.

Take wind power, a huge growth area. We don't make a single wind turbine in Britain. We import from Spain, Germany and Denmark, which got the wind in their sails long ago and now have 90 per cent of all the industry jobs. Or nuclear. We have only one postgraduate nuclear engineering course - at Manchester University. Our nuclear engineers are as few and ageing as our nuclear plants. The consensus seems to be that any new plants will be built mostly with French and American components, and French labour.

Even solar energy is dominated by Germany, where nearly half a million houses have solar roofs because its Government pays above-market rates for individuals selling power back to the grid.

The sad thing is that these aren't arguments for us to start subsidising our own renewables industry. They're actually arguments that we should do nothing so damn foolish.

We are in a situation where Johnny Foreigner has gone and done all the research (an expensive thing to do), developed an industry in scale (more expensive) and ladled out squillions in subsidies to do so (extraordinarily expensive). Now that they've got these industries producing items that we want at prices we're happy to pay our correct course of action is to go and buy some of them. The very last thing we want to do is pay out the same eye watering sums to replicate what they already have.

Sure, we'll have to produce something that someone else wants to buy off us to pay for them but that's fine. It doesn't matter whether that something is in the green energy field, insurance, ballet performances or pork products. We specialise, just as they have, and we swap the resulting production.

We really don't have to go and build these machines ourselves when others are already better than us at doing so. There's this process called trade out there which will get them for us. Might be worth looking into it, don't you think?

UAW leaves MI SOL

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As someone from Michigan, I’m upset by the plight of the 'Big Three' car manufacturers. However, it is not Congress that has dismayed me by not bailing them out, but rather the extraordinarily selfish refusal of the UAW (United Auto Workers) to accept pay cuts. GM currently pays workers over $70/hr (wages, plus pensions, and health care for workers, retirees, and spouses), while Toyota’s labour costs only $48/hr. The UAW have refused to guarantee to take a pay cut before their current contract ends in 2011, seemingly oblivious to the fact that the companies may well not exist by then.
 
I'm in full agreement with those who voted against the bill: the UAW needs to make sacrifices for the sake of its workers and the survival of the industry. It is unfortunate that the local press has blamed the Senate for the failure to reach a deal, while the unions get away with strangling the life out once world-beating businesses. Sadly, chapter 11 bankruptcy is probably the Big Three's only way out.

And with an estimated 3 million jobs tied to the Big Three and their failure, it’s only a matter of time before Michigan finds itself in serious trouble as well. While the Bureau of Labor Statistics reports national unemployment at 6.7 percent, Michigan sits at 9.3 percent, with nearly half a million residents unemployed. The US as a whole is coming to realize that it is in a recession; Michigan, however, has (arguably) been in one for eight years. Unlike the rest of the US, the state was unable to recover after the downturn of 2000, thanks to its uncompetitive industrial base.
 
Regardless of whether a bailout yet goes ahead, the cost of Detroit to the taxpayer is expected to be high.  According to the Detroit News, “If two of the Big Three declare bankruptcy and are forced to liquidate, federal and state taxpayers would lose $66 billion in the first two years alone".

In the long run, I understand that automakers would be best off filing for bankruptcy protection, allowing for massive restructuring and rebuilding of the auto industry.  In the short term, however, it’s a frightening time for Michigan.

Blog Review 807

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Quite the most astonishing story today is of a hedge fund in New York. Or rather, a Ponzi scheme masquerading as a hedge fund. $50 billion has gone missing. Yes, $50 billion.

A bit of background on that fund. No one could work out how they were making money....and of course now we learn that they weren't making any.

The fund had $17 billion under management....from fewer than 25 investors!

So the new boss is the same as the old boss or, neo-feudalism meets the old sort.

The essential argument for spending over tax cuts as a fiscal boost is the size of the multiplier. It turns out that this might favour tax cuts over spending rises.

More on how the Government rigs those public consultations.

And finally, the things you have to say to sell bonds these days.

A lesson from Indiana?

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I went to a fascinating lunchtime discussion at the International Policy Network yesterday. The guest of honour was Grace-Marie Turner (left), the president of the Galen Institute in DC and an expert in free-market healthcare reform. She gave a fascinating talk about the problems facing US healthcare, and the approach President-elect Obama is likely to take to reform.

One of the interesting things about the healthcare debate in the US is that they actually have so many different systems operating at once: there are health savings accounts, private insurance, managed care, government 'insurance' (Medicare), and even single-payer systems (healthcare for veterans and native Americans). And then there is Medicaid (publicly-funded healthcare for the poor), which operates differently in every state. Such multiplicity may make the system difficult for outsiders to understand, but it also means that there is enormous scope for both experimentation and the analysis of different policies.

One state in particular seems to be taking an innovative – and potentially very significant  – approach. Indiana Governor Mitch Daniels has essentially turned Medicaid into a high-deductible insurance plan for those earning less than 200 percent of the Federal Poverty Level. Participants get fully subsidized and comprehensive healthcare, but must pay for the first $1100 of annual treatment themselves. The plan requires individuals to make mandatory monthly contributions (topped up by the state if necessary) to a health savings account, which can then be used to pay directly for these expenses.

The great thing about this system is that ensures everyone has access to healthcare while also confining 'insurance' to its proper place – protecting people against big-ticket expenses. Extending third-party payment to minor treatments (as most health systems, public or private do) is actually a major driver of cost inflation in healthcare, since it imposes significant administrative costs, gives both the doctor and the patient an incentive to maximise costs, and blunts incentives to stay healthy. Getting patients to pay directly solves these problems.

It is fairly easy to see how such a system could be translated into the UK as a major NHS reform, which could have significant benefits for patients, doctors and taxpayers.

Brown and out

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Gordon Brown thinks he's saved the world, but not everyone agrees. Take Peer Steinbruck, the social democrat German finance minister. In a wonderfully un-diplomatic interview with Newsweek magazine, he said:

The speed at which proposals are put together under pressure that do not even pass an economic test is breathtaking and depressing. Our British friends are now cutting their value-added tax. We have no idea how much of that stores will pass on to customers. Are you really going to buy a DVD player because it now costs £39.10 instead of £39.90? All this will do is raise Britain's debt to a level that will take a whole generation to work off. The same people who would never touch deficit spending are now tossing around billions. The switch from decades of supply-side politics all the way to a crass Keynesianism is breathtaking. When I ask about the origins of the crisis, economists I respect tell me it is the credit-financed growth of recent years and decades. Isn't this the same mistake everyone is suddenly making again, under all the public pressure?

Err.... Yes, pretty much. He continues:

We have a bidding war where everyone in politics believes they have to top up every spending program that has been put to discussion. I say we should be honest to our citizens. Policies can take some of the sharpness out of it, but no matter how much any government does, the recession we are in now is unavoidable. When I look at the chaotic and volatile debate right now, both in Germany and around the world, my impression and concern is that the daily barrage of proposals and political statements is making markets and consumers even more nervous.

Again, that's about right. Nick Bosanquet calls this 'Toxic Keynesianism'. Rather than raising confidence and increasing demand, the expectation of constant change can cause a crisis of confidence and exacerbate the economy's downward spiral. Yet politicians insist that 'something must be done', regardless of the consequences. Back to Steinbruck for the final word:

It is the yearning for the Great Rescue Plan. It doesn't exist. It doesn't exist!

The better option

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The blogger, Harvard economist, and former chair of President Bush's Council of Economic Advisers, Greg Mankiw had an interesting piece on his blog yesterday regarding the relative merits of spending increases and tax cuts as ways of boosting the economy. In a nutshell, tax cuts are better:

Bob Hall and Susan Woodward look at spending increases from World War II and the Korean War and conclude that the government spending multiplier is about one: A dollar of government spending raises GDP by about a dollar. Similarly, the results in Valerie Ramey's research suggest a government spending multiplier of about 1.4…

...By contrast, recent research by Christina Romer and David Romer looks at tax changes and concludes that the tax multiplier is about three: A dollar of tax cuts raises GDP by about three dollars.

Of course, I would argue that public spending doesn't really boost the economy at all, since it necessarily involves taking capital away from the (more productive) private sector in the form of taxes or borrowing. Public spending also crowds out private spending which, again, would probably have been more effective in boosting the economy. Still – even if you do accept that public spending is an economic stimulus, the research suggests tax cuts remain the better option.

Hat-tip to James Forsyth on Spectator CoffeeHouse

Blog Review 806

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No, political corruption isn't that rare in the US: and as public choice theory tells us, we shouldn't expect it to be either.

So what, exactly, do the unemployed do with their time? Certainly, not a lot of it is spent looking for a job.

Explaining that Nobel acceptance speech.

An update on the Campaign to Abolish the TV Licence. 200,000 pledges so far....

Netsmith enjoys how much this news will enrage a certain type of Green. Walmart is becoming the greenest retailer in the US.

One explanation (and a very useful one) for what is happening in the markets these days:

There has been a massive crash in the risk tolerance of the globe’s investors.

And finally, the thinking behind that alcohol crackdown.

First, stop digging

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Alistair Heath had an excellent 'Editor's Letter' in the City AM last week. His main point was that the UK economy is currently being hit by two separate problems: the credit crunch (and its consequent downturn) and a "devastating drop in long-term competitiveness".

I agree. And the problem is that in attempting to deal with the first problem (i.e. the recession) the government is almost certainly going to make the second problem even worse. That is to say the government is going to run up massive debts and (inevitably) raise marginal tax rates, damaging the UK's economic competitiveness and hindering its long-term recovery, in order to increase spending in a misguided attempt to stimulate the economy.

This spending isn't going to do much good because, as Russell Roberts puts it, the government "can no more stimulate the economy in the short run than you can make a child grow a foot in a week. Genuine growth takes time." The only thing government can do is "help create an environment for that growth to take place by unleashing the creativity inherent in a nation's people and those they trade with in other countries."

This is key point: there is going to be a recession, it is going to be unpleasant, and there is very little the government can do about it. Years of cheap credit fuelled an asset bubble, causing capital to be misallocated; now that bubble has burst, the economy inevitably needs to adjust. Nobody wants to see companies go out of business and jobs lost, but government interference will only store up more trouble for a few years down the line.

Ultimately, the only thing government can really determine at this point is what kind of shape we'll be in once the recession passes. Policy should be focused on the long-term health of the economy, not just motivated by a 'something must be done' mentality. For more detail on this, it's worth having a look at Reform's recent publication The Hole We're In, which is one of the best things I've read on the subject.

Dignity and privacy

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Reading the words of Mary Ewert - the wife of Craig Ewert – one is struck by the intelligence and thought that clearly went into his decision to end his life. However, it is not only his decision to die that is causing a furore, but the decision for his death to be broadcast on Sky television.

I did not watch the documentary. This is simply because it was of little interest to me. As a (relatively) young and healthy person, I did not want to sit and watch the end of this man’s life. However, when father time, faulty genes or the pleasures of life catch up with me, if faced by a similar choice to Mr Ewert, this documentary will prove a rare and vital source of information.

Much has been written on this documentary breaking the taboo of death. Yet this documentary in fact breaks the much larger taboo of ignorance. Death is often degrading and unpleasant; those close to it are immersed in a blanket of silence and misinformation. This documentary allows people facing degenerative life to make their decision with the facts in mind.

It was surprising to hear on Radio 4 Phil Willis – Craig Ewert’s former MP – bemoaning the lack of privacy that this documentary shows. The point about privacy is that it is ours to do with as we wish. Willis’ convictions are his own, while the Ewert’s convictions are theirs. Politicians have a lot answer for in regards to protecting our privacy: a politician defending privacy is hypocrisy on stilts.

Those who were liable to be offended by the documentary should not have watched it. Unlike death and taxes, it could have been easily avoided.

Blog Review 805

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You know, there might be a reason why the top people at Exxon are paid so much money. They at least didn't get taken in by the bubble.

Getting it the wrong way around. There are some areas of life and the economy too important for us not to use markets.

Explaining the green and scaly option.

Even in these hard times there are still some people making their fortunes. You might not want to help them do so though.

One banker explains why he shorted Merrill. Essentially, whatever the boo boo, they always seemed to end up getting the short end of the stick. So it's not quite shorting Merrill, rather betting that there would be a future boo boo.

(Serious bad language warning). How those Government consultation exercises work. They're more a consultation of government than a consultation by government.

And finally, explaining the auto bailout.