Obvious solution is obvious

We’re told of another environmental problem that we simply must do something about.

The world is facing an imminent water crisis, with demand expected to outstrip the supply of fresh water by 40% by the end of this decade, experts have said on the eve of a crucial UN water summit.

One of the joys here is that one part of the insistences about what must be done will actually solve the problem as defined:

Mariana Mazzucato, an economist and professor at University College London, also a lead author, added: “We need a much more proactive, and ambitious, common good approach. We have to put justice and equity at the centre of this, it’s not just a technological or finance problem.”

No, that’s not it. In fact that’s exactly wrong - such a surprise from that source. The answer in the actual report is entirely the opposite of a common good approach.

As with Garrett Hardin and the standard approach to commons tragedies, the answer is to stop treating the scarce resource as a commons. As The Guardian says:

…pricing water properly…

As the report says:

….We must cease underpricing water. Proper pricing…

That’s all that actually is required. As with those stories of California farmers using $300 worth of water to produce $200 worth of alfalfa proper pricing removes uneconomic uses of water entirely.

We must correct the misallocation of water via property rights

Proper pricing does exactly that. As we know, the initial allocation of property rights doesn’t matter as long as we have a subsequent free market. Assets will, through that market magic, end up in their highest value use. Job done.

They have a whole section:

We must cease underpricing water

Quite so.

That the report contains the answer is nice but of course that’s not what’s actually going to happen. Vide that blather about turning it into a common good.

The problem is that it is a common good. As Hardin pointed out, when Marxian access results in demand higher than possible supply then there will be shortages of that common good. The answer is to allocate property rights, institute a free market in the good and thereby make water a private, not a common, good. This is the answer to fishing problems (ITQs), copyrights and patents, to farmers and their fields. It is also the correct answer to water.

After all, when farmers can make more by supplying water to cities than by spraying it on fields then that’s what they’ll do. The problem is thus solved. For the entire analysis here is that farmers currently spray too much expensive water onto fields and not enough is left over to go to cities.

It is entirely true that not all commons problems are solved by private property rights and markets. Water is one of those that is.

Full expensing isn't - not really - a tax break, It's Keynesian stimulus

We have a certain problem here when one of the major newspapers of the nation fails to grasp the basics.

Jeremy Hunt has launched a flurry of tax breaks to encourage investment by businesses after the double blow of microchip designer Arm opting for a New York stock market listing and AstraZeneca deciding to build a new factory in Dublin.

Businesses that invest in IT equipment and machinery will be able to claim back the cost by writing it off against tax on their profits, the chancellor announced in his budget on Wednesday.

Businesses always have been able to write off the costs of investment against taxes upon their profits. Not only always have been able to do so there’s no possibility of a rational tax system upon profits in which they cannot.

Called “full expensing”, it will allow firms to claim up to 100% of the cost of the investment.

This has always been true and always will be.

The only thing that changes here is when can a business take that deduction. To fail to grasp this is to be ignorant of the subject under discussion. As one of us has noted elsewhere this is not the first (or even the second) time The Guardian has made this dreadful mistake.

A profits tax is levied upon profits. Upon that gap of the revenues from being in business against the costs of being in business. Buying a computer, a lorry, building a factory, is a cost of being in business. Therefore it is subtracted from revenues in order to arrive at the profit figure which is then taxed.

On the basis that politicians prefer money to spend now - while they’re still in office - we place limitations upon how much of those investment costs any business can claim this year. Whether we call them capital allowances, allowable depreciation or whatever doesn;t change the essence. We don’t allow a business to claim all of this year’s investment costs against this year’s profits.

Except, with full expensing, we do. And that’s it. All full expensing is is the removal of the limitations we place - time limitations, nothing more - upon a business being able to put the costs of being in business against the revenues of being in business.

The effect of this is to remove the delay on claiming the costs for the business. Equally, and obviously, it reduces profits tax this year. But over the life of the investment the tax paid on the profits is the same (with very minor issues over the interest on the cashflow). All that changes is which year that tax is paid.

Which allows us to show that this is in fact Keynesian demand stimulus. Government now delays - delays only - gaining that tax revenue from corporate profits. This, assuming steady spending, widens the budget deficit. That is the very definition of Keynesian stimulus, we’re just using the business investment channel to do it rather than handing out welfare cheques.

Business always is able to expense the full cost of investment against corporate profit taxes. All that “full expensing” means is that it’s able to do it today, not next year or next decade.

We can’t help but think that the world would improve if those who wrote about the tax system for major national newspapers had even the vaguest grasp of the tax system. Full expensing affects cashflow, not tax revenue over time.

Just to explain a detail about that lithium discovery in Iran

A certain amount of excitement as Iran claims to have found 8.5 million tonnes of lithium reserves. Apparently this will make Iran very rich and will also change global geopolitics.

No. We explained all of this, at length, some time ago. This is, in anything like a useful approximation of reality, trivially unimportant.

The claim:

Ebrahim Ali Molabeigi Iran’s minister of Industry announces “the discovery of the first lithium reserve estimated to be 8.5 million tonnes of lithium carbonate equivalent (LCE) in Hamedan province signalling positive news of the possibility of other reserves in the western Iranian region”.

Just no. If the claim is “estimated” then it’s not mineral reserves. Reserves are what has been proven, not what is estimated. Resources are the estimated, vague, stuff. We can even check this:

According to Iran’s industry officials, the lithium reserve, discovered in western Hamedan Province, holds up to 8.5 million tons of the element, and considering the world’s current discovered lithium reserves, Iran could hold up to 10 percent of the total global reserves.

The U.S. Geological Survey, which maps raw materials deposits across the planet, estimated the world’s total lithium reserves to stand at roughly 89 million tons.

No, USGS has global mineral resources at 89 million tonnes.

Owing to continuing exploration, identified lithium resources have increased substantially worldwide and total about 89 million tons.

Some will think that this is a trivial detail. But this isn’t - this is a definitional point of vast importance. Mineral resources are where from we think, to are pretty sure, we can dig up something of interest. Mineral reserves are where we have proven this to an economic and legal standard. It costs tens to hundreds of million of dollars to convert a resource into a reserve. Mineral reserves, that is, are a human made manufacture. They also equate, largely enough, to the current stock of extant or soon to be opened mines.

There is no, none, zip, connection between the amount of reserves and the amount of resources. Yes, contrary to all those claims from the environmentalists. There is no relationship at all between the volume of one and the volume of the other.

Finding a resource of lithium - in a clay that no one has proven, as yet, can be mined economically - is something of vague interest to aficionados of the outer edges of the mining industry. It’s not a fact of any geopolitical importance, nor really of any economic.

Definitions do matter. The error here is almost certainly one of translation. That the translator - perhaps even the Minister - does not know the difference between resource and reserve so the wrong word is used in the English language announcement.

Only if we understand the terms of art in a field can we work out what is being said in and by that field. Or even, report correctly what the field is saying. Finding lithium resources at this level of proof is not something of any great importance.

When technology changes then so does everything else

Well, yes, obvious but sometimes we do need the obvious pointed out:

On Wednesday, the bank revealed it was selling some of these investments at a loss to raise cash. Its shares promptly went into freefall.

At that point “Slack and WhatsApp groups lit up across the startup scene”, according to the Wall Street Journal. A mild panic turned into a stampede in the time it took clients to open their banking apps and transfer money with a few swipes of their finger.

By the close of play on Thursday, depositors had withdrawn $42bn from SVB. That night the Federal Deposit Insurance Corporation stepped in and seized the bank before it reopened on Friday morning.

Modern technology does indeed mean that information moves faster, that people can react to that information more quickly. This does indeed change things.

Time was when a bank might go bust and people 100 miles away would hear of the bank run days, even weeks, after it had happened. There’s a considerable literature insisting that 19th century American banking out west actually worked on this very basis. Northern Rock needed that film of depositors besieging offices to become the flood. Today, smartphones, banking apps, it all happens much faster.

OK. Now what?

Well, the answer is not very much to be honest. All banking is always a confidence trick in the sense that once the confidence is gone then so is the bank. That’s just fractional reserve banking for you.

We’re still there with the original question. Is the maturity transformation we gain from FRB worth having, even at the cost of runs? If it is then, well, there we are. If it isn’t then equally so. But that is the actual question. That modern technology enables them to happen faster is an interesting observation but not the nub of the matter at all.

A little challenge for a modern monetary theory

There’s an insistence out there that banks simply don’t lend out deposits. In one sense it’s even true. Banks lend money then look for the deposits to fund such lending. After all, capital plus deposits always does equal the loan book, as every bank balance sheet ever shows. Further, banks have to make sure those books balance at the close of the business day every business day.

That the funding comes after the loan - that’s what the bank’s treasury department does - doesn’t change the fact that the deposits fund the loans.

Therefore all this insistence that banks just create the money that they lend isn’t, in any useful sense, true.

We’ve now got a test of it. Silicon Valley Bank just went bust. There was a bank run. Deposits fleeing the bank that is. But if deposits fleeing the bank make it go bust then clearly deposits are important to a bank. They serve some important function, this must be so. And the function they serve is to fund the loan book. SIVB is bust because it can’t fund the loan book because the deposits went on that rat run.

Which is something of a challenge to this modern monetary theory that deposits don’t fund loans, banks just create the money by the act of lending. If it’s true that deposits don’t matter then Silicon Valley Bank isn’t bust. It is. Therefore deposits matter.

We would be interested to hear any attempts at explaining SIVB’s failure which conforms to that modern theory that banks don’t lend out deposits. But we do think that any such is going to run up against that ugly fact that SIVB is bust. As ever, when a theory is contradicted by reality it’s the universe that wins, not the hypothesis.

The Climate Change Committee should be guided by the science

The Climate Change Committee (CCC) has an impressive line-up of highly intelligent people. On 9th March it issued a 131 page report which “illustrates what a reliable, resilient, decarbonised electricity supply system could look like in 2035, and the steps required to achieve it.”

The use of the subjunctive is important: this is what the committee wishes for, not what they expect to happen. For example, the second key message is “the Government must give equal focus to low-carbon flexible solutions as to the full delivery of its existing renewables and nuclear commitments.” Existing renewables have already been delivered and the Treasury has ensured that the Government has no nuclear commitments beyond Hinkley Point C which was approved back in 2016.

The first 10 of the 25 priority recommendations, basically, tells the Department for Energy Security and Net Zero (DESNZ) to do its job. Those of us under the impression that the PM should be the one to get the DESNZ to do its job are obviously living on the wrong planet.

The CCC’s first key message in its previous year’s report was “The UK Government now has a solid Net Zero strategy in place.” Where has it gone? That report’s 619 pages did not have space to disclose what it expected net zero, i.e. 2050, electricity demand to be. In their 6th Carbon Budget, however, they expect electricity demand to double, to just over 600TwH p.a. from 2018 to 2050. We are not told the basis for this forecast, just “CCC Analysis”. Unfortunately, it does not look right. If the overall demand for energy remains about the same as now and electricity’s share moves from 15% (2018) to nearly 100% (2050), as it must for zero carbon, the increase will be closer to seven times.

The CCC are enthusiasts for the role of hydrogen, which gets no less than 833 mentions in their 2023 report. But 2022 report showed that it is three and a half times less efficient for heating homes than electricity. Producing green hydrogen using electrolysis uses more electricity than it replaces which means it is useful for storage, if surplus wind is used, but not for much else. Generating electricity from blue hydrogen rather than the gas used to make it, is less efficient than simply using the original gas. In short, the CCC enthusiasm for hydrogen is wildly over-stated.

There are many good things in the CCC report and it would be churlish to continue to find fault beyond concluding that it is unreliable. They are right that preparing these strategies and forecasts, and making the necessary decisions, are matters for DESNZ and HM Treasury, not a parliamentary committee. For that purpose government should be advised by a science and technology committee akin to SAGE for COVID-19, not the green lobbyists, however talented, that make up the CCC.

We should learn from the COVID-19 SAGE experience in two respects: 1) the members and the relevance of the science and technology expertise should be published and 2) their advice to DESNZ and HM Treasury should be promptly published so that it is open to peer review. As it happens, such a team already exists informally; it would not be a big step to take it public.

Markets are the cure for this, not the cause

The new thing the cool kids are saying about the internet:

…what’s been happening on the internet for at least 25 years, namely the inexorable degradation of the online environment and our passive, sullen acceptance of that.

Examples? Everywhere you look. Take Google search that, once upon a time (1998), was elegant, efficient and a massive improvement on what went before. You typed in a query and got a list of websites that were indicated by a kind of automated peer-review called PageRank. Now, the first page of results from a search for “high-quality saucepans” produces a myriad of “sponsored” items, ie advertisements.

….

Thanks to Cory Doctorow, the great tech critic, we now have a term for this decay process in online platforms – enshittification. “First,” he writes, “they are good to their users; then they abuse their users to make things better for their business customers; finally, they abuse those business customers to claw back all the value for themselves.” Enshittification results from the convergence of two things: the power of platform owners to change how their platforms extract value from users and the nature of the two-sided markets – where the platforms sit between buyers and sellers, holding each hostage to the other and then raking off an ever-larger share of the value that passes between them.

No. Well, yes and then no.

This isn’t about a particular type of market - the two sided of Jean Tirole and all that. Nor is it something about capitalism, the owners deciding to grab as much value as they can.

This is about organisation. As the late, great, C Northcote Parkinson pointed out, or Pournele’s Iron Law of Bureaucracy. Organisations, by their very nature, become established and then they are run to maximise the utility of the organisation and the people in it. That just what happens among human beings.

Getting this right is important. For it happens to bureaucracies, political parties, entrenched class interests (if we want to take it that far) too. There is also no real cure for the problem. Organisations just do that.

Therefore what we need is a method of getting rid of organisations that become so. Which is why markets are the cure. Any organisation that stops pleasuring its consumers will, eventually at least, go bust in a competitive market. It is only those which do not face competition and thus the threat of replacement who can continue in this manner down the decades.

That is, there’s a truth to Doctorow’s observation. But the implication of it is not that there’s something wrong with companies for that can take care of itself. Rather, how do we subject bureaucracies to the only known cure, the threat of extinction?

Whaling does indeed tell us something about oil and fossil fuels

The Guardian asks:

The modern oil industry was born in 1859, yet it would take more than 100 years – and the near-extinction of a species – before it replaced blubber. As we now seek to replace oil in turn, are there lessons to be learned?

Yes, absolutely. The clue is here:

But it is worth remembering that whaling did not end because the industry found its conscience or progress made everything better. Whaling ended because there were no longer enough whales to turn a profit

Not wholly and not quite. What really happened is that oil became both cheaper and better than whales as a product to use. Therefore people stopped using whales - thus no profits to be had - and used oil instead.

So, what is necessary to stop us using oil? That the alternative, whatever new technology that is, be better and cheaper. This is not only necessary it is sufficient. Humans like cheaper and better, it’s what makes us richer. So, create the technology which is cheaper and better and people will entirely naturally stop using oil and use instead the new.

Well, get on with it then.

What does anyone expect?

This amuses more than anything else:

Teaching unions have criticised a “politically motivated” review of the way sex education is taught in schools, after Conservative MPs voiced concern that children were being exposed to “graphic” material including “lessons on oral sex”.

This is not to comment upon how sex is taught in schools nor what is age appropriate. Of course we have views on that but that’s not the point to be made here.

The education budget is getting on for £60 billion a year at the moment. That’s £60 billion lifted from the populace - by politics - and allocated to education - by politics - and therefore there is politics involved in what is done with it.

How could it be anything else but politically involved? All discussions of what is taught in taxpayer funded schools is going to be politically motivated simply because we’ve put the entire school system into the hands of politics.

It is, obviously, possible to have entirely non-political schools. Those are going to be the ones that don’t take money from the political process. That is, not-state schools.

This applies across all areas of life of course. It’s also blindingly obvious. If politics provides the funding then politics is going to be deeply involved in how it is spent. The only way to have a part of life not subject to “politically motivated review” is to have a part of life that is not funded by the state and politics.

Seriously, what do people expect? That everyone’s going to chip in the thick end of a hundred billion quid and not ask for some oversight in return?

An alternative formulation of the point is that fine, you think this is an area of life that shouldn't be touched, determined or reviewed by politics. Fine, have at it - the only way you’ll get that is by not funding it through politics.

Superabundant Wind

The Departments of Business and Energy have made the rather good observation that the decline in British industry is, in part, due to UK energy prices being higher than our competitors.

They plan to “supercharge” industry by reducing the energy costs of the 300 or so largest manufacturers, not by taking the money from primary producers like Big Oil and their extravagant profits of late, nor from the Treasury (heaven forfend!), but from ordinary households who, once energy prices start falling, will not notice.

The Energy Intensive Users Group (EIUG) have a case, albeit unquantified, but only 210,000 members.  It is not clear who the other 90,000 plus beneficiaries will be or how they are to be selected.  And is it fair to other companies who do not have the time, or inclination, to join the EIUG but are just as penalised?

The cost of the measures will eventually be funded through consumer bills, with the cost to the average household expected to be an extra £3-£5 a year. As there are about 28.1M households in the UK, the “carefully crafted” supercharge for the 300 or so manufacturers would be rather over £100M p.a.

The Departments of Energy and Business have not shared their “careful crafting” but this would seem a relatively small incentive and certainly ineffective in supercharging industry.  Trinomics produced an interesting review of EU member state energy subsidies in 2018, i.e. when the UK was still in the EU, which did not appear to support the action now being taken.

Rather than clobbering the poor old consumer, it would be far better to network what should be the lowest cost electricity production, i.e. wind farms, directly to these 300 or so large manufacturers. The odd thing is that, thanks to government intervention, the three Europe countries with the highest electricity prices: Denmark, Germany and UK, have the highest share of wind generation. The Trinomics research shows that government interference in energy marketing is the main reason for higher costs. If government really wants to supercharge manufacturing, it should simply butt out of pricing energy.

The reality is that the Energy Department is living in fantasy land and have yet to grasp that energy shortage forces prices up and only a superabundance will bring them down. The new policy is based on their energy strategy white paper of 2020 in which the figures simply did not add up.

This month, the National Audit Office, in the course of demanding an update, said the longer the energy department “goes without a critical path bringing together different aspects of power decarbonisation, the higher the risk that it does not achieve its ambitions, or it does so at greater than necessary cost to taxpayers and consumers.” And the NAO is assuming we will need only 60% more electricity by 2050 whereas, if total energy demand is static, the electricity demand will grow by 100%.

The truth of all this is a little embarrassing: the government confuses making announcements with making decisions.  When it comes to energy, the wind comes from Whitehall does not drive turbines. On-shore wind farms are officially approvable but are effectively banned.  Just one was built in England last year and no plans are on the table. 

Great British Nuclear has been announced countless times since April 2022 but no decision has yet been made.  Sizewell C was consulted upon in 2012 followed by four further round of consultation concluding in 2019. In November 2022 the Chancellor announced a decision would be made “within weeks” and that has now been postponed until, probably, 2025.

Our government seems to be under the impression that a superabundance of energy will drive prices down and that will come from off-shore wind and nuclear because they say so.  The reality is that Whitehall wind achieves nothing and the lights will go out unless action is taken soon.