Advice for the Observer: don't believe your own casuistry

That statistics get twisted to make a political case is hardly a surprise to adults. But a useful piece of advice is that you really do have to recall how you’ve twisted them.

Anntoinette Bramble, chair of the Local Government Association’s children and young people board, said: “The Competition and Markets Authority has confirmed our own findings that private equity providers are making extremely high profits and carrying concerning levels of debt that risks the stability of homes for children in care, which is paramount if they are to thrive.”

It’s not possible to both make high profits and also carry excessive debt. If your profits are high then debt isn’t a problem for it can be serviced. If debt levels are a problem then profits are not high enough to service it. It’s an either or situation here.

What they are actually doing is looking at gross profits and saying they’re high. Then at debt levels and saying they’re high. Without making the connection that gross profits are what you make before financing costs. Given that children’s homes do require the existence of a home they’re measuring profits before the cost of having a home, debt levels after.

Casuistry, of course.

Now that we know that the figures are being played it’s possible to ask how else they’re being fudged.

The Observer examined the most recent Ofsted inspection of private children’s care homes. It found that 114 homes were given the lowest “inadequate” rating, which triggers further investigations. Of those, about 20 were run by providers with links to private equity. It comes amid continued frustration with the “broken” provision of children’s care homes.

Note what we’re not told. How many of the homes are being run by private companies, how many of those are connected with private equity? That is, are the results from private equity worse than other methods of provision? Better? We’re simply not told. We’re just told that some private equity run homes aren’t good enough. Without the information to be able to see whether that result is better, worse, the same, as other organisational and or financing methods.

The last time this subject came up we were told:

The 10 largest providers of children’s social care placements made more than £300m in profits last year, according to research that will fuel concerns over profiteering by private providers.

From which we might - reasonably, but with no certainty - conclude that private equity is the majority of the sector, but very much the minority of those homes rated inadequate.

Which is a very different message from that being given in this piece in The Observer.

The LGA’s position is obvious. No bureaucracy likes to see itself being bypassed. So, the LGA is against private provision of children’s homes. The Observer however:

an Observer investigation has found.

Well, come on then, do an investigation. What is the portion - for that is what matters - of good bad and indifferent dependent upon the management and financing method? Instead of just repeating whatever spin it is the LGA would seem to want to spout.

Oh, and another suggestion. Those investigating need to be people who know the difference between gross and net profit. For if you’re too dim to grasp that then accounting really isn’t a subject for you.

We know this is picky but could George Monbiot try reading his own sources?

Apparently the rich world should simply abolish all poor country debt to make up for the climate costs imposed by the rich world on the poor countries. That’s the latest Monbiot suggestion. Quite why someone who has lent to a successful and profitable business - for yes, of course, this is intended to cover all commercial debt as well - should have to give up getting it back is left unsaid.

However, the demand depends upon two different papers. Firstly, an evaluation of previous debt relief and how that might be extended. This insists that such debt relief only works when subsequent policy is sensible. Economic policy in the relieved country is sensible that is. Limit future debt to some reasonable multiple of export earnings for example. In fact, the outcome is pretty much that those who follow the precepts of the Washington Consensus - that list of stupid things not to do to an economy - do well, those that don’t, don’t.

The second underlying insistence seems to be that trade is bad. Poor people selling things to richer is exploitation. We can see this just because the wages poor people earn are lower than those richer do. QED.

Threading a policy between these two positions doesn’t seem possible. Which is why we’d rather urge Monbiot to check his sources rather more carefully. Because without understanding proposals it’s not really possible to start recommending them, is it? Or at least, not sensible to do so.

Food goes into people, not cars

Many will have noted the insistences that the Ukraine and Russia events are leading to a significant rise in the price of food and the possibility of shortages out there. There is indeed talk of famine rearing its ghastly head again as a result.

At which point, why are we putting food into cars?

Europe burns over 17,000 tonnes of rapeseed and sunflower oil every day – the equivalent of 19 million bottles[1] – a new Transport & Environment study shows. This has contributed to spiralling food price rises as well as empty supermarket shelves in the wake of Russia’s invasion of Ukraine. T&E has called on governments to prioritise food over fuel and end the use of crop biofuels now.

It does seem somewhere between odd and vile, doesn’t it? It’s not even as if it reduces CO2 emissions given that most analyses show that the crops require about as much to be grown as is supposedly saved.

We could also point out that this is a long running schema:

The 10% target was included in the 2009 RED that mandated EU member states pass laws to boost renewable energy use within power generation and transportation.

It used to be only 5%, now that 10% target has recently been reached. And yes, it gets worse:

The next phase of RED will target 27-29% of renewables in transportation by 2030.

Food goes into people, not cars.

The base and important lesson of both the Stern Review and William Nordhaus’ work on climate change is that whatever we do don’t, just don’t, let the idiots try to plan things. Set prices and leave markets to do the work.

So, that’s working well then, isn’t it?

This could well be so, yes

A strange complaint about the international aid business:

Boards and senior leadership positions in NGOs are dominated by white people and based in high-income countries such as the UK, underpinned by false assumptions that best practice originates in wealthy states, the report said.

The basic moral and logical contention here is that some places are rich, some are poor. This means that there is that moral duty for the richer to aid the poorer and thus the transfer of economic wealth from one to t’other. That is the logic being used.

Best practice is whatever it is that makes one place rich, another not so much. That’s the subject under discussion after all. So, logically again, best practice does indeed originate in the wealthy states. Because that’s the proof of the pudding, these are the things which make a place richer.

We’re trying to aid poor places in becoming richer. This does indeed mean following the policies that made rich places rich. How can anyone complain about that?

Prices are information - no, really, price changes tell us things about reality

That prices are information is obvious. Yet all too many don’t quite grasp how important this point is. So, a little story from the past pointing out that changes in prices allow prediction. There might be the slight echo or tarantara of an own trumpet being blown here but the story still stands as an example.

Back in 2013 one of us said, elsewhere:

The most cheering thing I've heard recently on this subject is that the price of thorium is now positive. That might not mean much without explanation, so here goes: There's thorium in all sorts of minerals from which we already extract interesting metals. The tantalite and columbite that we make our capacitors from for example: there's enough in the wastes from their processing that old factories that used to do this are now Super Fund sites in the US.

Vast sums of money being spent carting off the lightly radioactive wastes into secure storage (actually, just to piles by uranium mills). And if you actually happen to have any thorium around, as I do, getting rid of it is a very expensive proposition.

The usual solution to this sort of problem is that you refine whatever it is up to a useful commercial purity then sell it. But there's almost no one out there still using thorium: thus the price of thorium, given the disposal costs, is actually negative. Until just recently, that is.

Lynas, which has built a new rare earths refinery in Malaysia, will have thorium as a byproduct (there's always Th in your rare earth ores). They've announced that they're getting offers to actually buy it from them: the price has turned positive.

Now, OK, that's possibly only a matter of interest to metals geeks like myself: but what it actually means is that someone, somewhere, is being serious about starting up test runs of thorium reactors. It's the only possible use for the material these days in any quantity.

If someone's buying then someone is at least considering filling up a test reactor. My best guess is that this is the Indian research programme: although it could, possibly, be the Russian one and there are rumours of a Chinese as well.

From Nature, Sept 2021:

China prepares to test thorium-fuelled nuclear reactor

That prediction turned out pretty well actually. It was also driven by absolutely nothing other than that the price of a particular metal has changed. From negative - an expensive waste that must be managed - to positive, something that folk actually desire.

Prices are information. The trick is to work out what they’re telling us, not attempt to either change or ignore them.

There's an old Bernard Levin line

He asked, rhetorically, whether it is better to have a tombstone marked “He always kept his word” or “He always acted from the best intentions”. He, as with Bernard Weatherill a couple of decades later, plumped for the former as being the more desirable.

In 2020 Sunak said he was changing the definition of RPI at the behest of the UK Statistics Authority to make it identical to CPIH, the consumer prices index adjusted for housing costs, with the change coming in from 2030.

RPI has long been discredited as a measure of the cost of living because of a methodological flaw in the way it is calculated and other drawbacks. It typically comes in at around 0.8-1 percentage point higher than CPIH each year.

Well, yes, except the bonds were sold on the RPI definition, not the CPIH. The government therefore collected the money at the price connected with RPI, not CPIH.

The Treasury has argued that there is no case for compensation because linkers would still be linked to “RPI,” just a differently defined RPI.

So, it appears that government fails that Levin/Weatherill test then.

So much for putting our faith in the words and promises of government…..they can’t even keep their word about which type of inflation they’re going to charge to protect us from.

We grasp the concept of state planning

Leaving folk to just get on with things might have the occasional gap in it, we agree. It’s possible to think of having some organisation that sits down, considers the future, then sorts out those problems that pure markets might not, for some reason, really take care of.

We do grasp the concept:

After decades of neglect, Britain scrambles to keep the lights on this winter….Yet the bleak reality is this new generation of nuclear power plants will arrive far too late …. a string of existing plants are approaching retirement, putting UK nuclear power generation on course to fall to the lowest levels seen since the 1960s over the next few years. …..One worst case scenario by Whitehall predicts six million homes will be left without power this winter….Under current plans, the fleet will be reduced to less than 4 gigawatts of capacity in two years’ time…..Following talks with the ONR, EDF recently ruled out keeping Hinkley Point B open, saying it would have taken too long to put the safety case together and that time had “run out”.,,,,,and on and on.

This is not a problem that has crept up upon anyone. Reactors last for decades, take decades to build.

It’s possible that the incentives of democratic politics simply do not support long term decision making of the kind needed here. It’s also possible that the British state is simply incompetent. But what is obvious is that if we are to consider the desirability of state planning then we’ve got to consider the outcomes of what plannings the state does or does not currently do.

They’re no good at it, are they?

So, whatever the theoretic joys of having that government planning the tough stuff for us it’s not a system that actually works in practice. Ho Hum, lovely theories destroyed by ugly facts again.

A Weekend of Good News

For a liberal economist and Westminster-watcher — not to mention someone startled by rising household bills — the weekend’s business pages made depressing reading. For a start, the Norwegian state energy company Equinor, objecting to the government’s windfall tax on energy firms, says it’s re-thinking its planned new drilling in the Rosebank field near the Shetland Islands. Shell too — remember, they’ve just written off $1bn in Russian investments and now we’re going to hit them with a new tax — also seems likely to press on with the $2bn Cambo project in the North Sea. So that’s not so great for the UK, particularly Scotland.

Meanwhile we are still maintaining Richter-scale guidelines for fracking that are twice as high as those applicable to onshore oil extraction, and roughly equivalent to someone sitting down in a chair in the next room, so that potential bill-cutter is going nowhere.

And the other prospect, new nuclear capacity, seems far off. Hinkley Point C in Somerset, the first of the new generation plants, will not come online until 2027 — if we’re lucky. Thanks to the Blair government’s decision to phase out all the UK’s nuclear stations (made to appease the party’s anti-nuclear lobby rather than for economic or energy reasons), plus the Cameron government’s enthusiasm for wind farms and biomass (in the attempt to out-green the Greens), our existing nuclear plants are approaching retirement. So the ‘green levy’ on household bills now amounts to £153 per household, and with oil and biomass being disrupted by Putin’s war, we still face the prospect of six million homes facing blackouts this winter.

Another member of that dismal decade, the 1970s, is that rail and London Underground strikes are going ahead. Average pay with bonuses at Network Rail is £41,000 and that of train drivers if £48,000, far higher than the average of their customers, but still they are prepared to use their monopoly power to demand more and to resist modernisation and automation that would introduce better and more reliable services. Well, what do you expect when you nationalise an industry? A public monopoly encourages employees to focus on the deep pockets of the government rather than the needs and convenience of their customers. It’s perfectly natural and understandable. So why does the government think it can run trains better and more cheaply than competitive operators? And why did it not open up the system to more competition, with open access for example, rather than take the easy bureaucratic route of nationalising it?

The other thing we saw in the 1970s, of course, was inflation, which further encourages outlandish pay demands. Featherbedded by their monopoly power, unions demand settlements that reflect not just what their members have lost in the last year, but what they expect to lose in the next. It led to the miners demanding a 24% pay raise, something the rest of us might wistfully dream of.

On inflation, though, the Bank of England has completely bottled it. The Fed last week raised interest rates by 0.75 percentage points — though they are still historically at ‘crisis’ levels. Despite predictions of inflation hitting 11% by Autumn, the Bank’s Monetary Policy Committee, dominated by Whitehall insiders, raised rates by only 0.25%, to 1.25%. In other words, interest rates are deeply negative, and look as if they are staying so. In the 1970s, I paid 17% on my student overdraft, but I didn’t mind, as inflation was 21%. In other words, the bank was paying me to take their money. And the same thing is happening now. The Whitehall suits, who have never run a business in their lives, do not seem to understand that inflation is far more damaging than any damper on growth caused by higher rates. Rising prices affect everything, and make it hard to see when real prices (like the cost of overdrafts) are high or low — so it leads to absolutely crazy investment decisions, with money being spent in unsustainable ways.

Then of course there are the interventions in the rented housing market. Yes, there are real problems there, caused by past policy mistakes. But further restraints will make property owners think twice about renting out their places. So rented accommodation will become even scarcer and more expensive. That is bad news for poorer people and younger people whose budgets are already stretched. And they have already been robbed of any prospect of owning a home because the population is growing at about 300,000 a year, but thanks to some of the most restrictive planning regulations in the world, we are not building anything like that number of homes. Rich homeowners get richer, poor renters get poorer.

The really depressing thing is that we have been through all this before, in living memory. There is no reason to make the same mistakes again. But when you have a government that caves in to media headlines and interest-group campaigns, rather than one driven by clear principles and economic common sense, that’s what you get. Sad, really.

As we keep trying to point out, AI is supposed to be biased

We can’t help but think that there’s a category error in here:

There are many issues relating to AI about which we should worry. None of them has to do with sentience. There is, for instance, the issue of bias. Because algorithms and other forms of software are trained using data from human societies, they often replicate the biases and attitudes of those societies. Facial recognition software exhibits racial biases and people have been arrested on mistaken data. AI used in healthcare or recruitment can replicate real-life social biases.

Timnit Gebru, former head of Google’s ethical AI team, and several of her colleagues wrote a paper in 2020 that showed that large language models, such as LaMDA, which are trained on virtually as much online text as they can hoover up, can be particularly susceptible to a deeply distorted view of the world because so much of the input material is racist, sexist and conspiratorial.

We want our AIs to be useful in the real world. For their pattern recognition to tell us something useful about real world patterns.

If human beings are biased - and given the definitions being used of “racist”, “sexist” and so on we all are - then so too must the AIs be biased if they’re to describe that real world.

Of course, it would be possible to train AIs on resolutely non-racist and non-sexist material. Say, nothing but the tweets of Owen Jones and Laurie Penny. It’s just that any output from such models is unlikely to have much relevance to that universe outside the windows. Which rather obviates the purpose of making the models and AIs. A bit like the effort of making convex shovels, really not the point of the effort at all.

At heart we think this is the same as the GOSPLAN delusion. Lovely models of how the economy should work can be constructed. But if base human nature is ignored then such models will depend upon such as New Soviet Man to turn up to make it work - he didn’t, it didn’t. The same will be true of any model of human behaviour or society that assumes - or insists - that we’re all free of those current sins of racism or sexism and whatever other are the modern claims. They might well end up being very pretty models but they’re not going to be of any practical use. So, why bother?

If we want to model humans then we’ve got to model them as they are, not as some might wish them to be. This is as true of AIs as it is of economic models.

But it doesn't matter which it is

These two are posed as being opposites, exclusionary cases, yet they’re not:

No wonder Uber, Deliveroo and Lyft have lost more than half their value this year, far worse than the Nasdaq average.

For much of their life, the question of whether these businesses are tech companies or merely older business models in fancier packaging has been left unanswered. While they have claimed they are making industries more efficient and improving consumer experiences, critics have complained they simply exploit regulatory loopholes to undercut incumbents.

Exploiting regulatory loopholes to make industries more efficient and improve consumer experiences is not some negative activity that we wish to prevent. For it’s still doing that job of increasing efficiency and the consumer experience.

That regulations prevent this from happening is a fault in the regulatory system, not the attempts to make consumers better off.

Yes, of course that entirely ignores whether these are viable businesses for the long term. But we’ve a system to decide upon that too - that very market they’re competing in. If they go bust, ah, well, nice try, no cigar.

The entire process is beneficial - after all, it’s not entirely unknown for incumbents to shape the regulatory system to ensure that they cannot be undercut now, is it? In which case radical market entry aimed at just those restrictions is markedly beneficial, isn’t it?