Sadly, Ed Davey still doesn't understand carbon cap and trade systems

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This is something of a pity of course, for not only is he the politician in charge of this area he's also been in charge of it for some years now. You'd rather hope that someone would have clued him into how cap and trade systems work by now but apparently not. Perhaps people have tried and he's not able to grasp it? The problem is that Davey seems to think that a low price for a pollution permit is a bad thing: that because pollution is bad therefore a high price for the right to pollute would be better. This is, of course, the reverse of what is actually true:

The EU cap-and-trade system is the world's largest. By putting a price on every metric ton of carbon emitted and allowing companies to trade allowances, the system enables carbon-reduction targets to be met at the least cost.

But the market currently has a surplus of about 2 billion emission allowances, equivalent to a year’s supply. As a result, carbon prices are at an unhealthy low. So what has gone wrong, and what can we do about it?

Some believe that a weak carbon price benefits business and the economy, but it does not. It undermines the low-carbon investment we need now to meet long-term targets. Ambitious emissions-reduction targets are here to stay, so delaying low-carbon investments just pushes the cost of achieving them later down the line and risks increasing it. It also means losing out on the potential growth and jobs that come with such investments.

Facepalm.

There is no surplus of permits: there's exactly the same number of permits that there were when the politicians set up the system. That many of them are going unused does not mean that pollution is not being reduced: it means that reducing pollution was easier than the politicians thought it was going to be when they set the number of permits. And a low permit price does not mean that people are not working to reduce emissions: it means that it's far cheaper to reduce emissions than we all thought it was going to be.

Davey's simply got the wrong end of the stick here about what prices are telling us. If we were to have a carbon tax then yes, it would be the price which would be what limits emissions. The higher the tax the more emissions would be limited. But prices work the other way around in a cap and trade system. The limit on emissions is the number of permits. Price tells us not how many emissions will be limited but how easy or difficult it is to meet the permit cap. We would all very much prefer emissions permits to cost €0.01 per thousand tonnes CO2 than any thing higher. For it would indicate that reducing emissions is a great deal cheaper than anyone thought it would be.

Aren't we lucky that people attempting to plan our lives can't grasp even the most basic points about how to plan said lives?

Should central banks do emergency lending?

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A barnstorming new paper from the Richmond Fed, written by its President Jeffrey Lacker and staff economist Renee Haltom, argues that the Federal Reserve has drifted into doing too much credit policy to the detriment of its traditional goal of overall macroeconomic stabilisation.

In its 100-year history, many of the Federal Reserve’s actions in the nameof financial stability have come through emergency lending once financial crises are underway. It is not obvious that the Fed should be involved in emergency lending, however, since expectations of such lending can increase the likelihood of crises. Arguments in favor of this role often misread history. Instead, history and experience suggest that the Fed’s balance sheet activities should be restricted to the conduct of monetary policy.

The first step in their case is attacking the idea that the Fed was created to be a lender to specific troubled institutions or sectors:

Congress created the Fed to “furnish an elastic currency.”...In other words, the Fed was created to achieve what can be best described as monetary stability. The Fed was designed to smoothly accommodate swings in currency demand, thereby dampening seasonal interest rate movements. The Fed’s design also was intended to eliminate bank panics by assuring the public that solvent banks would be able to satisfy mass requests to convert one monetary instrument (deposits) into another (currency). Preventing bank panics would solve a monetary instability problem.The Fed’s original monetary function is distinct from credit allocation, which is when policymakers choose certain firms or markets to receive credit over others.

They go on to explain further the difference between monetary policy (providing overall nominal stability; making sure that shocks to money demand do not lead to macroeconomic instability & recessions) and credit policy (choosing specific firms to receive support and funds—effectively a form of microeconomic central planning):

Monetary policy consists of the central bank’s actions that expand or contract its monetary liabilities. By contrast, a central bank’s actions constitute credit policy if they alter the composition of its portfolio—by lending, for example—without affecting the outstanding amount of monetary liabilities. To be sure, lending directly to a firm can accomplish both. But in the Fed’s modern monetary policy procedures, the banking system reserves that result from Fed lending are automatically drained through off setting open market operations to avoid driving the federal funds rate below target.

The lending is, thus, effec-tively “sterilized,” and the Fed can be thought of as selling Treasury securities and lending the proceeds to the borrower, an action that is functionally equivalent to fiscal policy.

They go on to explain why Walter Bagehot provides "scant support" for the creditist approach to crisis management, while the facts of the Great Depression do not fit with the creditist story.

Finally, they note that even if there are inherent instabilities in the financial system—something far from proven—many of these are made substantially worse by central bank intervention in credit markets.

Financial institutions don’t have to fund themselves with short-term, demand-able debt. If they choose to, they can include provisions to make contracts more resilient, reducing the incentive for runs. Many of these safeguards already exist: contracts often include limits on risk-taking, liquidity requirements, overcollateralization, and other mechanisms.

Moreover, contractual provisions can explicitly limit investors’ abilities to flee suddenly, for example, by requiring advance notice of withdrawals or allowing borrowers to restrict investor liquidations. Indeed, many financial entities outside the banking sector, such as hedge funds, avoided financial stress by adopting such measures prior to the crisis.Yet, leading up to the crisis, many financial institutions chose funding structures that left them vulnerable to sudden mass withdrawals. Why?

Arguably, precedents established by the government convinced market participants of an implicit government commitment to provide backstop liquidity. Since the 1970s, the government has rescued increasingly large fi nancial institutions and markets in distress. This encourages large, interconnected fi nancial fi rms to take greater risks, including the choice of more fragile and often more profi table funding structures. For example, larger financial firms relied to a greater extent on the short-term credit markets that ended up receiving government support during the crisis. This is the well-known “too big to fail” problem.

I apologise for the length of the quotation, but the paper really is excellent. Do read the whole thing.

Why prostitution should be safe, legal and, well not rare actually

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We're all well aware of the way in which various feminists are insisting that prostitution should be made illegal in the UK. (A note for non-Brits, prostitution itself is legal in the UK, various activities around it, pimping, running a brothel, soliciting are not.) Two major counter arguments occur:

Most governments in the world including the United States prohibit prostitution. Given these types of laws rarely change and are fairly uniform across regions, our knowledge about the impact of decriminalizing sex work is largely conjectural. We exploit the fact that a Rhode Island District Court judge unexpectedly decriminalized indoor prostitution in 2003 to provide the first causal estimates of the impact of decriminalization on the composition of the sex market, rape offenses, and sexually transmitted infection outcomes. Not surprisingly, we find that decriminalization increased the size of the indoor market. However, we also find that decriminalization caused both forcible rape offenses and gonorrhea incidence to decline for the overall population. Our synthetic control model finds 824 fewer reported rape offenses (31 percent decrease) and 1,035 fewer cases of female gonorrhea (39 percent decrease) from 2004 to 2009.

If decriminalisation reduces rape and clap cases then we should probably assume that those who would criminalise it are pro-clap and pro-rape. So there's certainly an empirical argument against criminalisation.

There's also a good theoretical argument which is that what on Earth is the definition of an adult if it isn't someone who gets to decide what to do with their own gonads? So as long as everything is confined to consenting adults then renting out body parts is and should be no different from lending them out for fun or for free. That is, if consenting adults are, by law, allowed to have sex with any, and any combination of, other consenting adults it is absurd to distinguish between paid events of such activity and unpaid events of such activity.

Not that either argument is going to convince the more militant feminists but fortunately we all get to vote on their suggestions, don't we?

Why we're very much richer than the GDP numbers tell us we are

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We're continually told that GDP isn't actually all that good at measuring how well off we really are. It doesn't measure the costs of pollution, it covers only market activity, it doesn't look at the distribution of wealth or income and so on. All of those things are true. But it's also true that GDP measures grossly underestimate how well of we all are collectively as well. The reason is contained in that chart above.  Because GDP is only measuring matters at that equilibrium price.

That means that the producer surplus, the profits, gross margins, what have you, are included in GDP. But that consumer surplus is not.

An example of what is meant here. Your humble author lives in rural Portugal where the mains water supply comes from the City. The pricing system is sensible, possibly even rational, for a drought prone area. There's a low and fixed cost, some €20 a month, for a basic water supply. This covers the usuals for the average household, drinking, washing, cleaning, bathing, but no more. If you want to use more water, say to fill a pool, one must pay extra. And one pays more per unit of water the more one uses. Try to irrigate a substantial garden and that will costs hundreds of euros a month (and we certainly check for leaks now given that a jammed toilet cistern led to a €300 bill).

However, what are we really prepared to pay for water? We've lived in places where the tap water was not, at least not to those immune to various bugs, actually potable. At such times we were absolutely delighted to pay, say, €1 a litre for the 4 litres a day that a couple of adults might get through. Bathing water from the tap but drinking water from the bottle.

So we'd be perfectly happy, if no other method were available, to pay €120 a month for just our drinking water. Well, perhaps not happy, but we'd do it: and the important thing here is that we're now being charged €20 and getting all our bathing, washing etc water for free.

We have a consumer surplus of €100 a month,at least, something that is vastly greater than the €20 a month that is recorded in the GDP figures, and that €100 isn't appearing anywhere at all in the national accounts. As far as the usual measures of wealth and or income, even of living standards, we're just not noting that number at all.

It's very difficult to actually prove this following statement because no one can accurately measure that consumer surplus. The amount that people would be willing to pay if they had to but which they do not because of that equilibrium price. For if it could be worked out accurately, and who would pay the extra would be, then firms would be doing their darndest to charge those different amounts and thus turn the consumer surplus into producer surplus. In rather the manner that VW sells essentially the same car under the Skoda, VW, Audi, Porsche and even Bentley brands. Tart it up, slap a different badge on it and see if you can get someone to pay more for it: product differentiation to attempt to capture some of that consumer surplus. But it's arguable that that consumer surplus is, across the economy, many times the actual recorded GDP, as it is in the worked out example of water supply.

One more point about the very modern world. We're getting a lot of things for free these days, things that we used to have to pay for. That equilibrium price, that market price, is therefore falling, so therefore so is the contribution to GDP of those things that are becoming free. Music streaming, messaging, information search and so on. But the consumer surplus of these things is just as vast, if not perhaps greater, than that water example.

So yes, GDP isn't a very good method of judging how well off we are. For we've now got the absurd fact that as the consumer surplus grows with free things, we're actually recording lower GDP at the same time. We're all getting richer but the numbers say we're getting poorer.

 

You can't save the NHS money by giving lardbuckets gastric bands

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Apologies that we have to return to one of our treasured themes here at the ASI. But once again we are seeing the fallacy that reducing the number of fat lardbuckets will save the NHS money. It won't we're afraid, it just won't:

The National Institute for Health and Care Excellence (Nice) has just announced that it is considering lowering the BMI threshold for people with newly diagnosed type 2 diabetes for assessment and referral for bariatric (stomach-reducing) surgery. If this goes ahead, it could mean more than 800,000 additional people qualifying for possible gastric bands or similar treatments.

Perhaps some people out there right now are gearing up to the standard reaction, along the lines of: "Lazy, unmotivated lardarses getting mollycoddled by the state after they've stuffed their faces and not exercised. Why should the state pay for that?"

No mention of how losing weight (and avoiding maladies) through such surgery could save the NHS millions and therefore be classed as relatively cost-effective.

The problem with this saving the NHS money argument is that it is simply untrue. For obesity (and we do mean obesity here, not simply being overweight or a bit tubby) kills people younger than they would otherwise have been likely to die. And in a health care system where all medical expenses are picked up by the same organisation a longer life leads to greater total expenditure. This is well known and has been proven:

The actual numbers for lifetime from 20 years old medical costs were:

The lifetime costs were in Euros:

Healthy: 281,000

Obese: 250,000

Smokers: 220,000

This does not, of course, mean that the NHS should not fund gastric bands. We generally think that then purpose of said NHS is to aid us all in living longer and healthier lives so if that's the appropriate treatment to lead to that desirable outcome then that's just fine. But we can't bolster our argument in favour of the procedure by insisting that it will save money. It won't: if it works it will cost more, not less, over time.

It is this specific argument, the cost saving one, that is fallacious, not all and every argument about gastric bands or, indeed, the NHS itself.

What excellent news, risottos are becoming cheaper

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There are always those who will complain about delicious food becoming cheaper of course:

Half a century on, the Italian rice industry is suffering badly from foreign competition.

While Italian farmers sell a tonne of home-grown risotto rice for 322 euros, producers in south-east Asia grow it for less than 200 euros a tonne.

Rice producers in the Po and Ticino valleys will organise a week of protests and strikes against the cheap imports, starting on Monday.

“In the first six months of this year, rice coming from Cambodia has been subject to at least one fine every week because of the presence of unauthorised pesticides or the absence of the proper food safety certificates,” said Roberto Moncalvo, the president of Coldiretti, a national farmers’ organisation.

The absence of the proper certificates is, of course, in this modern world, a heinous sin. And that presence of pesticides. Hmm, perhaps that's something to worry about?

Gianmaria Melotti, a rice producer from near Verona, said rice arriving from countries like Cambodia and Burma was devoid of the weevils and grubs that afflicted Italy’s output.

“What are they putting in their rice fields, that they are able to eliminate all these insects? Saving Italian rice means also safeguarding people’s health,” he said.

That's an interesting one to think about really, isn't it? Safeguarding peoples' health these days means ensuring that their rice is not vegetarian.

The answer here is obvious: as Bastiat told us we should always be looking at any and every economic question from he point of view of consumption, the consumer. And here the answer is blindingly obvious. Simply label the two, the imports with may contain pesticides and the Italian with does contain weevils. Let the customer make the choice.

Excellent, so that's climate change entirely sorted then

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I take this to be exceedingly good news. Our struggles to contain climate change are entirely over and we can all go back to sleep:

Solar has won. Even if coal were free to burn, power stations couldn't compete

As early as 2018, solar could be economically viable to power big cities. By 2040 over half of all electricity may be generated in the same place it's used. Centralised, coal-fired power is over.

It's true that we don't normally believe The Guardian on matters environmental. But let us just take them seriously here.

As we all know the predictions of future climate change are based upon economic predictions of the future. How many people will there be, how rich will they be and what technologies will they be using to generate the power to create that wealth for that many people. And of the models that are used the one that tells us that we've a serious problem with climate change insists that we'll still be using coal for 50% of our power needs in 2080 or so.

We don't actually have to believe that in order to be able to observe that that is the central point of the alarmist case.

Excellent, so, if no one is going to be using coal in the future then we've not got a problem with climate change, do we?

Do note that this is not to take as being true, nor even seriously, any of the predictions that are being made by anyone. It is, rather, just to point out an important piece of logic. If solar is now, or will be imminently, cheaper than coal so that we all start to use it purely on economic grounds then the problems with climate change are over. For all of the models and predictions insist that we only get major problems if we don't stop using coal.

It cannot be true that solar is wholly (and unsubsidised) competitive, or cheaper, than coal and we still have a problem. Alternatively, it cannot be true that we still have a problem in hte future if we believe what we are being told about the imminent cost competitiveness of solar.

It's an either or thing.

Looking at the true numbers, rather than those provided by the boosters of solar power, it's probably a little early, 2018, to be saying that solar will be truly competitive. But by 2025 (as Bjorn Lomborg has long been saying) it almost certainly will be. Meaning that we don't actually have a problem and that we can indeed all go back to sleep.

The only way that this cannot be true is if solar doesn't become so competitive. In which case we shouldn't be working so hard to install it either, should we?

 

On the appallingness of traditional English food

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We're all well aware of the appalling nature of the traditional English cuisine. Oddly preserved vegetables (mushy peas?), grossly overcooked fresh ones, allied with dubious meat masked with gelatinous sauces. At least one American professor insists that the real reason for the British Empire was the desperate search for a decent lunch. That we found that lunch, as modern day English cuisine shows, is therefore why we gave up that empire, job done as it were. Paul Krugman has written on this point:

Maybe the first question is how English cooking got to be so bad in the first place. A good guess is that the country’s early industrialization and urbanization was the culprit. Millions of people moved rapidly off the land and away from access to traditional ingredients. Worse, they did so at a time when the technology of urban food supply was still primitive: Victorian London already had well over a million people, but most of its food came in by horse- drawn barge. And so ordinary people, and even the middle classes, were forced into a cuisine based on canned goods (mushy peas!), preserved meats (hence those pies), and root vegetables that didn’t need refrigeration (e.g. potatoes, which explain the chips). But why did the food stay so bad after refrigerated railroad cars and ships, frozen foods (better than canned, anyway), and eventually air-freight deliveries of fresh fish and vegetables had become available? Now we’re talking about economics–and about the limits of conventional economic theory. For the answer is surely that by the time it became possible for urban Britons to eat decently, they no longer knew the difference. The appreciation of good food is, quite literally, an acquired taste–but because your typical Englishman, circa, say, 1975, had never had a really good meal, he didn’t demand one. And because consumers didn’t demand good food, they didn’t get it. Even then there were surely some people who would have liked better, just not enough to provide a critical mass.

There's possibly a certain tongue in cheek element there but a great deal of truth as well.

However, there's one little point coming out of an economic history project looking at the First World War that throws an interesting light on all of this. They have been taking a detailed look at the heights of those who joined the Army after 1914. Did birth order affect height? Economic background? Crowded industrial area as origin? All those sorts of things and then we get this:

Nor do we find that living in an agricultural district confers much height advantage, as studies of much earlier eras have found, probably because market integration had diminished the benefit of living close to food sources.

Something that is most, most, interesting.

If the tasteless nosh produced by those canning and early preservation techniques had been less healthy (rather than just less appetising) than fresh grown country food then we would have expected to see some differential in height between rural and urban entrants into the Army. But we don't: differences in height are explained by many other factors but not by that access to fresh food or preserved.

Krugman may be right that that early urbanisation and the crude techniques used to preserve the necessary food led to the destruction of the palates of the nation for several generations. But while it may have led to a cuisine that would have (and did in some instances) make a Frenchman projectile vomit, there's not really any evidence that it was an unhealthy diet. At least, not compared to what they were still eating out in the countryside.

Brown Windsor soup, corned beef pie with two overboiled veg, spotted dick to follow anyone?

Inside the Adam Smith Institute

Now that the new Adam Smith website is up, with an exciting plethora of activities and reports scheduled, new readers might like to take stock of what the ASI does, and what motivates us. If labels are used, they might be "free market" and "libertarian," but these are big tents under which disparate people are grouped. The crucial thing is that our free market libertarianism is both consequentialist and empiricist, combining an essentially Hayekian economic outlook with a deep optimism about the world.

In our view actions that enable individuals to advance their happiness by pursuing their own goals are worthy of support, and those that restrict their ability to do that should be opposed. We are more concerned with what results from actions than with the intentions or attitudes of those who initiate those actions. And we are more concerned with changing the world for the better than with promoting theories about it.

As empiricists we make conjectures about the world and its future, and we test their value against experience of real world outcomes. Where the two conflict, it is the conjecture that has to be rejected or modified. We take the view that "an ounce of practice is worth a pound of theory."

While economics and public policy are complex fields that make experiment and testing difficult to perform, we do attempt to test proposals by their results. Several times we have proposed small-scale trials of larger ideas in order to validate the ideas and ascertain any unforeseen drawbacks before they are rolled out more widely.

We recognize, of course, that poor people do not have access to the choices and chances accessible to the rich, and this is why many of our policy initiatives are directed to improving the lot of poorer people in society. We have advocated for many years that the income tax and national insurance thresholds should be set at the level of the minimum wage and indexed to it, so we would not be taxing people on the bottom income level.

Some of our research studies and policy suggestions derive from our recognition that poor people are hurt most by things such as restrictions on international trade and migration, planning controls that prevent cheap housing from being built, education policies that condemn poor children to bad schools and regulatory policies that protect established market players from new entrants.

We propose and back policies that give all parents choice over where their children go to school and which introduce competition into the school system, whether these be by education vouchers, or by allowing the allocation of state funds to schools be determined by the choices parents make. We tend to back the view that welfare is not just about providing the services the state thinks poor people should have, but about equipping people with the means to make their own choices about the mix of services they prefer. Ideas such as a negative income tax could remove the perverse incentives present in the current welfare system.

We recognize that states can cause a great deal of harm when they attempt to direct and micromanage the economy. Many regulations have damaging effects that were not anticipated, and this includes financial regulations that can make financial systems more unstable than they would be without them.

More broadly, we think that the ‘unknown unknowns’ of regulation should lead society to prefer decentralized trial and error to the risk of one big mistake that affects everyone in the same way.

We have argued that the central bank should follow the ‘Hayek rule’ – the stabilization of the level of nominal spending in times of booms and busts along a predictable path. Scott Sumner recently delivered our annual Adam Smith Lecture and explained how the failure of the world’s central banks to do this led to the Great Recession.

In the Adam Smith Institute we have always been very optimistic about technology and society. We see the world becoming increasingly open and tolerant in most (though not all) areas, with technology and entrepreneurship helping to drive that. To us, companies like Uber, Google and Airbnb deserve to be celebrated when they break down barriers to competition and disrupt the existing way of doing things in ways that give consumers a better product for a lower cost. It is this kind of innovative entrepreneurship that moves the world forward and allows today’s luxuries of the very rich to be tomorrow’s household commonplaces.

There is a dark side when new technologies are used by governments to spy on their citizens and control them. If technologies like Bitcoin and other blockchain-based innovations represent a long-term way of evading the worst excesses of government intrusion, they should be defended from government now while they are still in their infancy.

Of course the Institute is not a monolith. It consists of people who sometimes differ, but all of whom are brought together by a desire to give more power and liberty to individuals, so that their regard to their own interest can make them and us richer, freer and happier.

Why golf is a rubbish sport

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The LSE's Paul Cheshire has a good post up on the Spatial Economics Research Centre blog today on green- and brown-field development. Among other things, he explains why there are so many golf courses on the green belt:

Nothing wrong with golf or horsey culture but what we have to understand is that Greenbelt designation gives those land uses a massive subsidy. House building cannot compete for agricultural land but golf and horses can. I recently discovered another reason why we have so many golf courses around our cities: they are substitutes for landfill sites. It costs £80 a ton to dispose of ‘inert material’ in registered landfill sites but nothing if it goes into building bunkers! To quote Paul Robinson, Derby Council’s Strategic Director for Neighbourhoods, in defending the potential to capitalise on the value of the sites of the Councils two golf courses: "Effectively you go out to the waste industry and you say we will allow you to put your inert waste in our golf course…So you create mounds and bunker areas using the waste and at the core of those is inert waste." .

This is one factor which underlies the proliferation of golf courses close to sources of builders’ waste and on land where there is no competition from houses. As noted in The Economist there is a serious oversupply of them. So the combination of Greenbelt designation and landfill costs means we can build as many golf courses as the market demands at their subsidised price but we cannot build houses. It is time to start turning some of our excess supply of golf courses into gardens; with houses on them!

The whole thing is a good read, particular the estimate of how much greenfield land is currently available to build on within a ten minute walk of a train station. (Quite a lot.)