The Pin Factory Blog

The Energiewende or “energy transition” in Germany is a cautionary tale in many respects not least the unintended consequences of policy.

The German energy policy has been guided by three European directives. A target for reduction in carbon emissions, an effort to increase energy efficiency and critically a target for renewables in the energy mix. The desire to cut carbon emissions may be laudable if somewhat ineffective if China and India continue to increase their output of CO2, and a push to reduce energy efficiency seems sensible. However it is the third of the EU directives that has possibly led to most harm. A target for renewables in the energy mix has forced EU governments to pick and support the only technologies that are scalable within the present timescale, regardless of cost. So Germany has offered large subsidies for solar and wind which has led to a huge increase in German energy prices but then had to offer subsidies to German heavy industry to shield them from the increasing costs of power. But then these energy subsidies to industry have in turn been challenged by the EU. Furthermore, the German government’s stance on energy includes decommissioning its nuclear power stations. This combined with an increase in renewables which by their nature provide intermittent power and which have priority access to feed the grid has destabilized the energy market. Gas plants previously providing base load power are now only used to balance renewables making them uncompetitive and leading to the bizarre consequence that Germany is now building new lignite coal power stations to provide this back up generation capacity for its large renewable sector.

So the end result is that due to the skewed policy response caused by EU energy policy, Germany is locked into very heavily subsidized solar and wind production causing energy prices to rise whilst at the same time building more coal fired capacity to back up the intermittency of its large renewable sector which negates the central plank of EU policy to reduce carbon emissions. And the increasing price of energy is seeing large German energy users turning to the US to invest in new plant and further carbon leakage to the developing nations

All this is in stark contrast with the US.  Cheap and abundant shale gas has pushed much of the  dirtier coal energy production out of the energy mix, so without heavy market intervention the US has dramatically reduced its CO2 emissions whilst slashing its energy costs. And whilst once the energy debate in the EU was in part characterized by showing the world how policy directives could lead the way in effective CO2 reduction the result seems to prove the exact opposite.

There's a lot of squealing going on about the system of business rates at present, most of it coming from the usual little pigs. The oinks are actually loud enough and coordinated enough to be considered a campaign to get the basics of the system changed. Which would be a bad idea given that rates are actually one of the better parts of our current taxation system:

Business rates are not fit for purpose and need a complete overhaul, MPs say in a report on Tuesday. Joining a chorus of critics, they call for the Government review into the future of business rates to be extended to consider whether retail taxes should be based on sales rather than the rateable value of a property. The MPs want the review, set up by Chancellor George Osborne, to look at the merits of giving retail its own business taxation system.

The first and most obvious point to be made is that we don't want to give any segment of business its own taxation system. We want all business to be competing upon exactly the same level playing field. For the obvious reason that we want not just new businesses to open, but also people to cross the boundaries of the various sectors as technology and incentives change. We certainly don't want people either being confined by their tax treatment to one sector, nor are we all that keen on people arbitraging across parts of the tax system.

But as to rates being one of the good parts of the tax system: they're a tax on using expensively located property. That is, they're akin to a land value tax (not entirely, but close) and are thus among the least distortionary taxes possible. This is, we should note, a Good Thing.

The real background to this is that those currently operating physical retail stores find their lunches being eaten by those who retail online. They want to pull some of the load off those physical locations and onto the drab warehouses round the back of town that we increasingly get our goods from. And you might think that that's fair: they're both doing retail after all, so why not tax equality?

But that's to misunderstand what is happening with the online retail revolution. We have found that we can , now, with better logistics and the internet itself, serve peoples' retail desires while using rather less of an expensive input: that high value retail space. This is a technological change that makes us all richer: for it frees up ever more of that high value urban property to be used for other things. Offices perhaps, burger bars or, if anyone's willing to get the planning system right, rather more of those houses and flats that we're all told we've such a short supply of.

We want to tax scarce things: precisely because it makes people more efficient in their use of that scarcity. Which is why, as I say, business rates are a rather good part of the tax system. And we shouldn't change it just because those getting the mucky end of the current stick are whining about it.

Commercial lawyer and ASI Fellow Preston J. Byrne explains why, despite the cries of his inner libertarian, more government involvement in Bitcoin would be a step forward for the cryptocurrency-cum-payment-system, rather than its end.

When Mt. Gox went offline last week, taking half a billion dollars’ worth of bitcoin with it, many of the cryptocurrency’s public advocates – some of whom lost “life-changing” sums –  moved swiftly to its defence. Erik Voorhees’ rallying cry, in particular, was a standout piece of Austrian rhetoric, warning against the near-universal social-democratic impulse to “cry out for Leviathan’s intercession” to remedy every petty inequity and misfortune.

This reaction should not be a surprise. Many early adopters, and practically all bitcoin users I know personally, are libertarians (Roger Ver, in his video-recorded post-Gox appeal for calm, can even be seen wearing a voluntaryist lapel pin). Many are mathematicians; few are lawyers. From this outside perspective, I’ve therefore arrived at a conclusion with which most of them will disagree.

To achieve its full potential, cryptocurrency needs a legal system in the traditional sense. It therefore needs a state.*

Read the whole thing.

As I noted yesterday there's a disturbing campaign going on to make the purchase of sex illegal. The argument being, the false argument being, that there's some appreciable amount of slavery among sex workers and that this is the only way that we can deal with the problem. That the original proposal came from the usual suspects worried me a little. That we then get ths from Theresa May which is much worse:

Modern slavery is an evil which is happening around the world today – including here in Britain. Across this country in restaurants, shops, brothels, nail bars and on illegal drugs farms are women, men and children, being held against their will, and forced into a life of slavery and abuse.

As I pointed out yesterday we have absolutely no evidence at all that there are any slaves, modern or not, in any brothels anywhere in the land. Indeed, when we actively went looking for such we couldn't find any. And the reason for this is actually quite simple. There are sufficient people entirely willing to sell sex at the prices currently on offer for it not to be worth the bother of trying to enslave someone to do it.

So, given that we don't have slavery happening in brothels we do have to wonder why Ms. May is so ill informed here. And we can diagnose that, at least in part, from something else she says here. That's that reference to "nail bars". Which is a ludicrous scare story that started here:

But it turns out that there may be another, far darker reason for the rise of the affordable manicure in the UK of late. A report by the Sunday Times (paywalled link) this week presented evidence about nail salons staffed by illegal immigrants, specifically from Vietnam. According to the report, industry insiders estimate that there are 100,000 Vietnamese manicurists working in the UK, despite only 29,000 Vietnamese-born migrants officially being registered in census data. [Questions raised below by commenters over these figures have been addressed in our Reality Check blog – see footnote.] It alleges that some of these illegal migrants are victims of "what appears to be a human-trafficking network" and that they are sometimes forced to work as prostitutes as well as manicurists.

"Industry insiders", may, possibly, allied with just entirely insane numbers do not proof of anything make. For a start there's estimated to be only 80,000 prostitutes in the country: we are really not going to start claiming that all of them are enslaved in Vietnamese nail bars, are we? Or that one in 200 women of fertile age in the country are in fact working illegally out of Vietnamese nail bars, or are Vietnamese themselves? This is actually such an absurd set of numbers that The Guardian itself had to investigate:

According to the latest statistics from January to March 2013, it is true that Vietnam is one of the top countries of concern, having the highest number of NRM cases after Albania, Nigeria and Poland. While even one case of human trafficking is one too many, the raw numbers do cast doubt on the implication that there are thousands of Vietnamese victims in the UK – 32 Vietnamese nationals were identified as potential victims in those three months.

32 people being abused is of course 32 people too many. But it's a rather different figure from 100,000.

At heart our problem here is simple. We've all cottoned on to the fact that the Socialist Calculation problem is intractable. It's simply not possible to have sufficient information to be able to plan the economy. But what we've not quite grasped, as yet, is that ths is not just a matter of economics. As above we've a scare story running about the country being infested with nail file wielding Vietnamese tarts and the government is proposing to legislate based on this most absurd of stories. But the information that the government is proposing to act upon is simply untrue. Obviously, clearly on the face of it, garglingly nonsensical. We simply do not have more Vietnamese women enslaved into prostitution than we do the total number of prostitutes in the country.

So what on earth is Theresa May doing? She is, God Save Us All, after all the Home Secretary. She has an entire department of people to tell her what is what, whch pieces of information are correct and those which are the fabrications of campaigners with an axe to grind. Why in heck isn't she listening to them?

There are times that I look upon those who would rule us and wonder where the collective IQ leaked out to. This is one such time: they're proposing that it should be made illegal to purchase sex in the United Kingdom.

Britain will today take a significant step towards reforming prostitution laws as the first cross-party report for almost 20 years recommends that only pimps and punters should be jailed or fined. The MPs and peers will recommend that the UK adopts a system whereby soliciting is no longer a punishable offence, but anyone who pays for sex is committing a crime. Prostitutes who are caught loitering on streets plying their trade should be given anti-social behaviour orders rather than being prosecuted, the group will say.

The Independent covers the same story:

What the All Party Parliamentary Group on Prostitution broadly proposes is Nordic-style reform, which is what the European Parliament also backed last week. This would shift the burden of prosecution from mostly women sellers to mostly male buyers and pimps. MPs are right to say that one of the root problems with Britain’s laws on the sex trade is that they send conflicting messages about who is in the wrong. If trafficked women, especially, are to be helped, they must be assured that the law is on their side. It is why the MPs want the mass of current legislation consolidated into a single Act, which makes it clear that only those who purchase sex will feel the rigours of the law.

One minor lunacy is the idea of ASBOs instead of criminal punishment. But an ASBO is only a way station to a criminal punishment anyway. Effectively it's a sentence that if you do that again you'll be jailed. Which, given that under the current law no one is jailed for being a prostitute seems to be an increase, not a decrease, in punishment.

But what's truly nonsensical, delusional even, is the basic philosophy at the heart of all of this. That many people don't like the fact that prostitution exists is true. But then I don't like Simon Cowell's existence either and no one at all claims that this gives me the right to ban him. The only possible claim that can be made in favour of the banning of prostitution, or even of the declaration that it is something wrong that we would like to minimise, is that it represents some form of slavery in which people are forced to do things they do not agree to doing voluntarily.

And that is indeed the claim that is being made, see that reference to "trafficking" in the Independent. However, the one thing that we do in fact know about the "slavery" in prostitution is that it doesn't, in this country at least, actually exist. For we had a plan whereby every single police force in the country went out looking for people who were indeed sex slaves. People who were being forced, against their will, into prostitution (ie, repeatedly raped, a vile crime). And when they had a look through all of the brothels, working flats, saunas and street walkers they could find not one single police force was able to come up with sufficient evidence to charge anyone at all with the crime of holding someone in such sex slavery. Operation Pentameter it was called and it's the biggest refutation of the hysterical case about trafficking that could possibly have been devised.

The vision some have of people being forced onto the game is simply untrue. What we do in fact have is consenting adults deciding to offer such services as they wish to offer for the cash being proferred to them. And this isn't something that requires customers to be made into criminals: nor is it something that requires suppliers to be made into criminals either. It's just not something that requires anyone at all to be made into a criminal. It's consenting adults deciding what to do with their own bodies.

The only laws which should (apart, perhaps, from a little bit of zoning and planning law) apply to commercial sex are those that apply to non-commercial sex. Consent, age, these sorts of thngs, and nowt else.

This entire suggestion to adopt the "Nordic Way" is based upon a delusion. That there is some amount of sex slavery which the innocent must be protected from being sucked into. But given that we cannot find any evidence of the existence of sex slavery that is indeed a delusion. It's simply nonsensical piffle and those who would rule us should be ashamed of offering up such an idiotic policy.

Instead I would propose an Act making bansturbation illegal. Bansturbators being those who get sexual pleasure from banning one or more behaviours of others. There's definitely too many of those around and unfortunately they seem to be in control of the legislature at present.

Staff at John Lewis are looking forward to bonuses totalling £200m this year. Everyone thinks this is wonderful, of course, as John Lewis is supposedly a fine example of a 'mutual', a 'partnership' that is owned by the people who work in the organisation.

Staff at the Royal Bank of Scotland, meanwhile, are getting bonuses of £576m. Everyone thinks this is terrible, as the banks are thought 'greedy', not to mention mean to customers who want business loans.

The RBS bonus pot is just over twice that of the John Lewis bonus pot. But RBS has a turnover around 15 times that of John Lewis, £19.7bn compared to just £1.4bn. In terms of the size of the organisation, therefore, RBS bonuses are pretty trifling.

Which is how it should be, given the bank's losses this year. Of course, not all parts of the business make losses, and it is reasonable that staff in the profitable bits should be paid proportionately. Even if some divisions are losing money, you might still want to keep paying them well, depending on how you think things will go in the future, and how much of an investment you have made in hiring and training up those staff members – not to mention keeping them out of the clutches of your competitors.

Bonuses are actually a good way for an up-and-down business like a bank to manage their remuneration. Instead of paying high basic wages and having to lay skilled staff off when things go bad, you can simply slim their bonus, knowing that many or most will hang on in the hope of getting larger bonuses when things turn up again.

But it is interesting that a bank can pay bonuses of less than a thirtieth of its turnover and everyone thinks it's wicked, and a 'partnership' can pay bonuses of a seventh of its turnover and everyone thinks it's a national treasure. Shows you how this argument is all about politics rather than economic and business reality.

I have to admit that I just love this story. For it speaks to that terrible problem that we face so often, trying to understand the difference between correlation and cause.

A number of studies have been done over the years trying to work out whether people are insider trading given the specialist knowledge that they have. For example, one such showed that Senators were getting a 12% annual return on their stock portfolios. The conclusion was that yes, they were indeed using their inside information about what laws were likely to be written and how. No prosecutions of course because this wasn't actually illegal but it was pretty clear that the activity was going on.

Using very much the same techniques researchers have had a look at the stock investments of the policemen of that world, the folks at the SEC. And the results do seem to indicate the same sort of conclusion:

In the report titled "The Stock Picking Skills of SEC Employees," researchers found that SEC employees' stock purchases look like your average person's. But when these employees sell their stocks, they appear to systematically beat the market by making sales within weeks of costly enforcement actions by the agency.

The smoking gun evidence is strong with this one. However, it's not actually the correct answer:

The SEC says it has an explanation. "Each of the transactions was individually reviewed and approved in advance by the Ethics office," said John Nester, spokesperson for the SEC. "Most of the sales were required by SEC policy. Staff had no choice. They were required to sell." Nester explained that before staff can work on an issue that involves a company, they have to sell any holdings of stock in that firm. As a result, he said, there shouldn't be any surprise that a sale would precede the announcement of an enforcement action.

I, for one, think this is a magnificent answer. The SEC decides in secret as to whether it will launch an investigation into a particluar stock. An SEC investigation is never, ever, about awarding a company a gold star for being the good guys. So an announcement of an SEC investigation is always, but always, negative for the price of the stock in question. Which means that the staff are forced, no forced!, to sell out of those stocks that might be affected by an announcement of an investigation. Forced simply by being brought onto the team that decides whether there should be an investigation or not.

What other jobs insist as a condition of employment that you do things that would be illegal outside the context of that employment? The SEC forces people to insider trade, the Army forces people to kill people....any other candidates?

Anti-dismal has a piece which tells me that, much to my surprise, I've not been a liberatairan, nor a classical liberal, all this time but in one respect at least I've been a Coasean:

Coase’s ‘market supporting’ credentials do not therefore derive from a position that market contracting is always best.They derive from his point that only the ability to try out different organisational settings and subject them to a test of survivability will reveal what structures are most productive. It is the existence of competition between alternative solutions to the problem of economising on the cost of transacting that is important. Planning and market transacting are both potentially helpful (indeed ideally equally so at the margin) and ‘what this mix should be we find as a result of competition’.

As I've mentioned many a time my view is that there are some things that have to be done and that can only be done with the compulsion available to government. There are also other things that are not best solved by the actions of markets unadorned. Then there's everything else where our own voluntary cooperation in markets guided by the price system will do just fine thank you very much. There are two questions that follow from this.

The first is the obvious one of how many things can be left to said market and how many others need to be done by government or without those markets. My basic feeling (which is what perhaps makes me a classical liberal again) is that there's not all that much that has to be done by government and most can indeed be left alone to our own private interactions.

The second is, well, how do we decide? How do we reach some useful definition of what should be left to which mechanism? And it is here that I have been, unknowingly, a Coasean. For my answer has been that we should have a market in methods of organisation and then see what happens. We can adopt the method that seems to work best in any particular situation.

I would go one stage further and add that I am, in some manner, also a Marxist, in that I'm quite happy with the idea that which is done best, how, can change along with the technologies we have available to do them. This is reminiscent of Marx's point about social relations being determined by technology. And I think that this last might be the most important political point of all. We currently regard both education and health care as being something the State must provide. Sure, we tinker with allowing private providers but the general consensus is that the basic services must be both financed and overseen by hte State. And I'm entirely unconviced that this is going to be true going into the future. It might have been true in the past but given the technological changes in both sectors there's no reason at all to think that the social relations might not be changed by technology.

If, for example, online eduational technology continues to improve as it has been then is it really necessary to turn over all children to the monopoly of the teachers' unions for 11 years of their lives?

Another way to put this is that if we assume that both Marx and Coase were right, then both would be telling us that the mix of State and non-State activities should be changing over time. Rather than the current situation where anything once colonised by the State seems to stay there.

Much is being made of a new paper from the IMF about the redistribution of income and whether this affects the growth rate or not. The general conclusion being drawn is that it does not. Indeed, there are even findings that redistribution increases the general growth rate. You don't have to wonder what that sort of finding is going to do to our domestic left. I've actually seen one, already, insisting that this means that any level of redistribution, all the way to total equality, will thus increase growth. However, that's not what the paper is actually stating.

John Cassidy has a good over view of it here but even he's not picking up on what I regard as the important phrase:

Redistribution appears generally benign in terms of its impact on growth; only in extreme cases is there some evidence that it may have direct negative effects on growth.

The question here is, well, what's "extreme"? I guess we would argue that killing all the bright people, shipping the more industrious peasants to the Gulag and eliminating the bourgeoisie as a class would count as extreme. But don't forget that there are still significant numbers of peope in British politics who sign up to the analysis behind this program, even if not the specific actions. So it might not be all that extreme.

We might also argue that 98% tax rates on investment income are extreme, 83% on incomes, but that's an extreme that happened within my own adult lifetime. And there are very definitely people who would like to bring that back.

The point I'm making is that even in the terms of this paper there are people here in the UK who still advocate "extreme" policies that would indeed have injurious effects upon the growth rate. And we should not allow them to use this paper as an excuse to argue for those policies: for it's very careful indeed to point out that "reasonable" levels of redistribution might be beneficial. We've still the argument to come over what is reasonable and what is extreme.

Not all that many people are aware of quite how appallingly bad most economics statistics are. Not in the sense of it's terrible that the numbers are as they are, but that the numbers are generally so shoddily lashed together. And this is obviously going to be even more true in hte poorer parts of the world. A government that hasn't quite worked out how to collect the rubbish isn't going to be all that good at counting the people nor what they do or earn.

The upshot of this is that we really don't know how many poor people there are out there. We know there are fewer than there used to be, and the poor are a very much smaller portion of the growing population than used to be true, but we really only know trends rather than actual numbers. Basically because the numbers we've got for things like GDP and inequality are so sketchy themselves.

So, enter another method of trying to measure things. What's one of the first things someone will do when they've finally got a couple of annas to rub together? Get in an electric light bulb, So, let us measure the amount of light that we can see from space and we can have a good stab at working out whither poverty. Which is exactly what this paper does:

Finally, we use the new optimal measure of true income to calculate the evolution of poverty at the worldwide level as well as at the regional level. Given that our optimal measure gives a small weight to survey means, our optimal estimates of poverty rates tend to be closer to those reported in the research that uses GDP as the anchor. Under our procedure, developing world poverty declines from 11.8% in 1992 to 6.1% in 2005 and 4.5% in 2010, much lower than the path constructed by giving a weight of 1 to the surveys, which entails poverty falling from 42% to 20.5% between 1992 and 2010. We run a battery of robustness checks on our findings; under the ones most favourable to replicating the survey-based results, the largest that we find developing world poverty to be in 2010 is 12%.

Excellent, things are better than we thought they were.

It's worth making on other point about the differences in these methods of measurement. There are those who insist that those developing economies need to be planned. The smack of firm government must guide their economy. But as we can see, the governments don't actually have the information they would need to be able to plan, even if this were desirable. So it's a doubly bad idea.