Why governments' attempts to pick winners produce more losers than winners.
Is Ed Balls a knave or a fool?
On Newsnight, he just compared eliminating the deficit in four years to paying down a mortgage in short order.
Let's consider the form that analogy should take if it were to reflect reality. Having engaged in rampant mortgage equity withdrawal over the past decade, we find that the interest on our escalating debt looks likely to consume an unsustainable proportion of our disposable income (particularly if interest rates rise above their artificially-low levels), forcing us to cut back on essential household expenditure on things like education, healthcare and security in order to pay our interest bills. Do we carry on regardless with further mortgage-equity withdrawal for the foreseeable future, or do we discipline ourselves to bring the growth of our debt to a halt as soon as possible?
Does he not understand the difference between debt and deficit, or is he consciously mixing the concepts to mislead the public? Once we've eliminated the structural deficit (if by some miracle the Government actually delivers on its promise), we haven't even begun to pay off our debt, we've just stopped it increasing. All we've done is stabilise our debts to some degree (if continued growth in the absolute levels of government debt is balanced by growth in GDP) at a grossly-inflated level. That's not remotely like paying off the mortgage, and it's a gross deceit or folly to suggest that it is.
Boris Johnson is quoted in MoneyWeek as having said to Management Today:
"To the banker bashers I say, what's your economic model? We can't ignore and hate the bankers. What would that achieve? Show me how reducing financial services boosts manufacturing."
OK.
For years, the UK ran a massive balance of trade deficit, i.e. as a nation we bought and consumed more than we produced and sold. It is no more sustainable for a nation's income to exceed its outgoing than for an individual.
I'm feeling a little damp. Or at least, feeling like I look a little damp to others. I've found myself on what many would perceive as the more moderate, centrist side of the argument several times recently.
I think I'm a “fractional reserver”. I don't think I buy the arguments of the “100% reserves” crowd. (EDIT: This link to the Cobden Centre has gone dead not long after the article appeared. They actually have three articles that have disappeared: Anthony J Evans' critique of a recent lecture by Jesus Huerta de Soto, Toby Baxendale's reply [the linked article], and Anthony's response to Toby. I guess they have decided against washing their linen in public, but it's annoying that other people's contributions have disappeared in the process. Still, maybe it shows that even the most committed of the 100% reservers are having second thoughts.)
I'm not convinced by the arguments for drug legalization.
I have a feeling that, in higher education, it is better to have no market than a skewed market.
I think the benefits of limited liability exceed the costs.
I believe not only in a social safety-net, but in universal coverage. I am strongly opposed to means-testing even the wealthiest citizens, however much that might seem like unnecessary government expenditure.
I don't think we should be cutting wherever we can. There are some government activities on which I think we should be spending more money.
I think we should take account of the risk of harm from anthropogenic emissions of greenhouse gases by introducing an institutional framework to internalize the social cost of those emissions.
What makes this all the moister is that I can't even state most of this boldly. I lack the certainty of the "driest" libertarians (but then again, I'm not a libertarian). I can imagine that I could be persuaded otherwise on most of this (except the means-testing).
And yet, I don't think I'm really wet. In fact, I feel like I am on the drier side of these arguments. I'm just not sure I can explain why (to myself, as much as to anyone else). This post is a bit of thinking out loud to see if I can put my finger on it.
Maybe they really were the good times. The last few years didn't feel like it, but at least the Government was subtle enough in its winner-picking that I would have to explain how its targeted measures were really supporting losers.
Now, our supposedly conservative and liberal government plans to pick its winners overtly and proudly.
Mr Cameron says that we need to target government support at “those industries where Britain enjoys competitive advantage”.
If they already enjoy competitive advantage, why should we tax industries with fewer advantages in order to support industries that don't need it?
The distinction between free markets and managed markets is, according to Dave, “a sterile debate between laissez-faire and hands-on government”.
What a pity Maggie wasted so much of her time on such a sterile issue.
“The question” he says “isn't 'Should government be involved?' - because it is involved. It taxes, it regulates, it invests. The real question is, 'What is the right kind of involvement?'”
i.e. “If I choose not to pick winners, I am effectively penalising them, so even non-intervention is intervention in my sophisticated, Oxbridge-addled, looking-glass world.”
Can we nail a fallacy that is becoming received wisdom, regarding the uncompensated withdrawal of child benefit payments to higher earners, as proposed under the UK government's Comprehensive Spending Review?
The rhetoric claims that it is unfair to tax the poor in order to pay benefits to the rich. This ignores the reality that our web of taxes and benefits cannot be treated individually in their effect on people's incomes. What matters in practice is the net position of each individual or household, after all benefits have been received and taxes have been paid.
Someone paying £20,000/year of tax and receiving £2,000/year of benefits is not a beneficiary of the state or of lower-earning taxpayers. They are a massive net contributor, whose effective tax rate is marginally reduced by the effect of the benefits. This is the sort of situation that all those whose child benefits have been withdrawn find themselves in. They are being pinged for increasing amounts of tax. Child benefit was one way that the impact of those increased taxes on families with children (who generally struggle more to make ends meet than families without children) was somewhat mitigated.
There are major problems with the marginal effective tax rates (i.e. how much of each extra pound is surrendered in tax or withdrawn benefits) on low earners, which are often higher than the marginal rates on mid-earners, and are a massive disincentive to find more work. Ian Duncan-Smith's proposals will hopefully ameliorate this poverty trap.
But in no reasonable sense is someone on £15,000 paying taxes so that someone on £45,000 can receive benefits. The marginal rates should not be confused with the net effective tax rates (i.e. the ratio of the net cost or benefit of welfare payments and tax impositions to earned income), which generally increase as one goes up the income scale. Someone on £15,000 is very likely receiving more in benefits from the state than they pay in taxes, giving them a negative effective tax rate. Someone on £45,000 is almost certainly paying much more in taxes than they receive in benefit, even before the proposed change to the child benefit rules.
The untapered withdrawal of child benefit from anyone in the higher-rate tax brackets creates a rare case where the marginal rate of effective tax is over 100% and disposable income after accounting for taxes and benefits actually falls as earnings increase. People will of course respond to this perverse incentive by trying to work round it in the usual ways.
If someone uses this rhetoric about poor people's taxes paying for rich people's benefits, you know they are bullshitting you: knaves or fools as usual. If they want to defend the policy with any degree of intellectual integrity, they should make the case why parents earning over £45,000 should be paying an even higher effective tax-rate than they were before the change was proposed, given the 40% and new 50% rates of income tax, National Insurance, and limited number of reliefs from these burdens. They would be wrong to make this case, but at least they could do it with integrity.
I have a post on the subject of student loans for higher education on the IEA blog, under the heading Academic interest: the free-market case against subsidised student loans.
One feature that distinguishes the current financial crisis from earlier ones is how widely the problem is spread. We have had bigger public debt than today, but never with so much private sector debt. We have had leverage-fuelled bubbles in one or other sector, but never managed to blow such massive, simultaneous, debt-fuelled bubbles in the public, financial, other business, and household sectors:
From McKinsey Debt and Deleveraging report.1
Nice to see, then, that each sector is doing its best to pull back from the brink:
I was contacted recently by someone who was studying the renewable heat sector. They asked:
We read your blog on Picking Losers and I guess the question is, given that DUKES Table 7.6 gives the existing renewable heat total for 2009 as 966 ktoe, is it that some of the categories that DUKES has as renewable heat, are rejected by DECC as not renewable heat in the 2020 sense?
For example, DUKES lists the technology break down as below.
Solar thermal 69.5
Municipal Waste combustion 31.3
Biomass - landfill gas 13.6
Biomass - sewage sludge 67.9
Biomass - wood domestic 375.2
Biomass - wood industrial 164.6
Biomass - animal biomass 40.3
Biomass - plant 203
Geothermal 0.8
As you note in your blog this total is something like 450 ktoe more than the NREAP states for 2010. Is it possible that they decided that there was double counting with electricity or that some of these are not really renewable?
I thought my reply might be of interest to others besides the original questioner, so I have decided to post it here:
You may be interested in an article of mine at the Cobden Centre website. Received wisdom is that governments should try to ameliorate the impact of the economic crisis by setting interest rates artificially low and penalising prudence. The article contains a suggestion of how to explain why received wisdom is wrong.
According to Angela Knight, Chief Executive of the British Bankers' Association:
"A bank is like any other business - if its fixed operating costs go up then so does the price of its product."
Angela has provided a nice illustration of how (a) banks are not like any other business, and (b) she has the same grasp of business and economics as most other politicians.
In a competitive market, prices are determined by customers' alternatives, not by suppliers' costs. Only in an uncompetitive market (or one with strong and inelastic demand, insufficient supply, and minimal margins) can suppliers automatically put up their prices to ensure that their margins are not squeezed by rising costs. In a competitive market with the amount of flesh on the margins that is indicated by banks' recently-announced earnings (if we take them as credible, as Ms Knight undoubtedly would), one would expect margins/earnings to be squeezed as a result of rising costs.
The sort of privilege that enables banks to take this sort of attitude can only be endowed by government - as we have seen since the start of the Credit Crunch. No wonder the banks appointed a politician to be their representative.
Imagine you are a politician, elevated after the recent election from shadow to head of a department. You have quite a bit of experience shadowing your department, but to be fair, you haven't had access to all the information and resources that ministers have. You find, on taking charge of your department, that the timetable for some issues is outside your control (e.g. where actions are required by European law). You will have to set out at least a holding position earlier than you would like. It's a pity to be rushed, but you were going to have to rely on your civil servants for much of the detailed drafting anyway, and they have years of experience and a draft close to completion, almost ready for you to sign off. Maybe you are worried a little that the draft may not fully reflect the changes of philosophy and policy that you hope to introduce, but with the addition of some judicious conditionals (i.e. weasel words), you can at least put out something internally consistent and coherent, which avoids commitment to any specific courses of action that you don't want to commit to. At the very least, you and your civil servants should be able to avoid the most egregious mistakes with a little, basic maths and the benefit of your combined years of experience, right? It may not be exactly what you want, but at least it will add up.
Apparently not, if you are Chris Huhne or a civil servant at the Department for Energy and Climate Change (DECC). They have just released the National Renewable Energy Action Plan, which they had to release by June 30 under the EU's Renewables Directive. And it doesn't tally, on even the most basic sanity checks, with the data for the current renewables position.
The economic debate is coalescing increasingly into two camps: those who think that the Government can prevent a further economic correction through deep spending cuts, and those who think that the Government can prevent a further correction through continued deficit spending. On This Week, Will Hutton just described the two camps respectively as Catholics and Protestants. As the British government is implementing a (roughly) Catholic programme, it is likely that the failure of this programme to prevent a correction will be interpreted by much of the media, academia and the population as evidence that the Protestants were right. Conversely, Catholics will point to the failure of Obama's essentially Protestant programme as evidence that they were right. Both sides will pay attention only to the evidence that suits their views. Neither side will consider that they may both be wrong.
Why are there so few atheists and agnostics in this debate? Maybe there is no God, maybe economic imbalances can reach a point where corrections are both necessary and inevitable, and maybe governments promising to prevent them only make matters worse in the long run, whichever creed they follow.
Our intellectual establishment (dominated by the Oxbridge prelacy) is ranged as powerfully against such heresy as the religious establishment was once ranged against those who placed reason above faith. Without the fear of eternal damnation, the promise of perpetual bliss, and the immutability of an order prescribed by a higher power, how were the clerical and aristocratic hierarchies to maintain their authority? And without the promise that they can make things better than they would be without intervention, how is our intellectual establishment to persuade us to keep listening, voting and paying for their arrogant yet ignorant prognostications?
Things didn't turn out too bad when we allowed reason to supersede faith. Authority did not collapse, but became based more on merit and less on position. There turned out to be other foundations of morality than simply having (often delphic or contradictory) rules handed down from above. Technology and our standard of living improved more quickly. People might find similar benefits resulted from apostatisation of the government-deity.
Be wary of strong drink. It can make you shoot at tax collectors... and miss. (Robert Heinlein)
When there's a single thief, it's robbery. When there are a thousand thieves, it's taxation. (Vanya Cohen)
HMRC, King Gord's tax collectors, have reached the same level of unprincipled acquisitiveness as under King John. Motivated by his targets-and-incentives regime, which rewards them in proportion to the degree of misery they can inflict on taxpayers, they treat the public contemptuously as little more than cash cows with probable criminal tendencies. So far, there is no sign that King Dave and Prince Nick have improved matters (voting reform being so much more urgent).
A month and a half ago, I was rung up by a highly aggressive woman from HMRC to tell me that I owed £175,000, and that I had better pay up by Thursday or they would begin enforcement. This came as something of a surprise, as it is considerably more, not only than the calculation in my tax return, but than my total earnings.
Eric Pickles has announced that he will abandon plans to charge people for their use of waste collection services (the "bin tax"). He will use the "carrot" of rewarding people with vouchers for the volume of recyclable material they produce, rather than the "stick" of charging them for the amount of waste they produce.
Mr Pickles justified this announcement as part of an effort to end "meddling" laws. (The other example of "meddling" that he planned to scrap was allowing people to choose whether to apply for redevelopment of their land.)
The move was also justified because charging people for their use of waste-disposal services would result in more fly-tipping and "bin wars".
And it was argued that the move would save money, because of avoided landfill tax (directly) and thereby European fines (indirectly).
Meanwhile, David Cameron was today warning people how much worse the government finances are than he had expected (for which, read: as bad as he knew they were but didn't dare to tell people during the election).
And let's not forget the great theme of this government: decentralisation.
Let us count the number of ways this is wrong:
Attended an enjoyable IPN book launch this evening, for Matt Ridley's The Rational Optimist. It sounds well-worth reading, to keep our current troubles in perspective. Met a couple of interesting guys whose sites I wanted to point you at:
And do you not think you're being just a bit optimistic about the Rwandan government? I don't trust governments in Europe or Africa who have 15- or 20-year targets, but for opposing reasons - in Europe I don't believe them because I know they won't be there when the time comes, in Africa I worry that they may well be. I'd be much happier with an ambition to put in place the necessities for a stable society and successful economy, than an ambition to be a middle-income country by 2020. Sounds too much like central-planning to me. And if so, that suggests that they don't understand the real route to prosperity, and are simply repeating the same mistakes that people have been making in Africa since independence. After all, if Kagame is there to see his ambition fulfilled in 2020, he will have been in power effectively for 26 years. Can you imagine anyone getting that sort of continuous democratic mandate (without rigging elections)?
Makes me rather less proud of our politicians, and particularly the Conservative Party, who seem mostly to have fallen prey to the usual post-colonial delusion: it doesn't matter if he's a dictator so long as he's "our dictator" doing things our way. Will they ever learn? No doubt Kagame's economic record is impressive, if somewhat dirigiste, but that isn't enough. Remembering Franklin's dictum about sacrificing liberty for security, we wouldn't accept the sacrifice of free speech in exchange for economic development in the West, so I don't see why we think it's OK for Africa.
Eleneus is struggling to find work in the UK. If you know of anything more suited to his skills than the social care work he is currently doing, let him know via his blog.
The following is one key point of the Queen's Speech proposals, from the front of today's Telegraph:
Academy schools introduced in England and Wales under plans to free outstanding primaries and secondaries from local authority control.
So the plan appears to be to take those schools for whom the current arrangements are working well and change those arrangements, while those schools for whom the current arrangements are failing are to remain under the current arrangements.
If the faint-heartedness of the cuts announced today* doesn't demonstrate the difficulties that the new British government will have when it comes to more difficult decisions, and that businesses and individuals will have in investing in the face of such uncertainty about and pervasiveness of government action, here is a small illustration from the renewable energy sector in which I work.
In the "good times", both Tories and LibDems had rejected an approach to pricing carbon and resource dependence based on fundamental principles, and had instead pledged to continue some of Labour's expensive, micro-managing, winner-picking policies, and to implement some new expensive, micro-managing, winner-picking policies of their own. They had not modified this position in the light of our economic difficulties, and so went into the election proposing a mess of interventionist policies that we couldn't afford.
One of those policies was the Renewable Heat Incentive proposed by Labour. Although the proposed levels of support were irrational and expensive, the Tories and LibDems both promised to carry it forward and to implement it by April 2011. However, the rent-seekers in the renewables industry have been shocked and disappointed to find no mention of it in the Coalition's detailed Programme for Government.
The energy companies? Our central bankers and Treasury representatives? Or both groups?
In America, prices fell in April, led by reductions in the cost of fuel and other energy. From The New York Times:
"Consumer prices over all fell in April by 0.1 percent, the Labor Department said in its monthly report on Wednesday. The decline was the first since March 2009... The downturn was led by a decline in energy prices, especially for gasoline and natural gas, the report said. Energy prices fell by 1.4 percent in April, the department said."
In the UK, prices rose in April, led by increases in the cost of fuel and other energy. From The Guardian (quoting Mervyn King, explaining why he was taking no action on inflation at nearly double his target rate of 2%):
"First, the impact of higher oil prices, which on average in April were nearly 80% higher than at the beginning of 2009, pushing up on petrol price inflation; second, the restoration at the beginning of January of the standard rate of VAT to 17.5% and third the continuing effects on inflation of the sharp depreciation of sterling in 2007-8"
The movement in the Pound/Dollar exchange rate between April 2009 and April 2010? The Pound had strengthened a little.
On Question Time tonight, there was yet more discontent with the politicians* claiming that "the people had voted for a hung parliament". It is becoming a well-trodden but sterile debate for most non-politicians to point out that none of us voted for a hung parliament, nor did many of us hope for that outcome, while most politicians (and some associated intellectuals) point out that as a group that is exactly what we did.
In its own right, this is not an interesting debate. Both sides are obviously right. But it is a nice illustration of the two basic views of the world, and of how confused is the average person's philosophy.
The two views are the aggregative and the individualist. In their frustration at being treated as part of an amorphous mass whose combined choices the politicians regard almost as the product of a single, anthropomorphous, group-being, most people reveal themselves as fundamentally individualist.
And yet these frustrated individualists continue (mostly) to expect the inherently aggregative system of democratic politics to deliver what each of them wants (or needs), when what rationally they should expect is the messy and unsatisfactory compromise that it must inevitably deliver in practice. They continue (mostly) to prefer delivery of many things on which there are wide ranges of preferences and needs, by the aggregative agency of democratic politics rather than by the individualistic agency of voluntary exchange.
Sometimes you find an error in a book so early and brazen that you barely feel the need to read further, and if you do, everything after that is diminished by the awareness of the author's bias or irrationality. A classic example is Marx's Das Capital, and his theory of value. It is palpable nonsense, on which much of his edifice rests. Anyone with a critical mind must surely see through it. There may be some grains of truth later, but one tends to discount them from awareness that his reasoning is prejudiced.
Sadly, I have just had a similar experience with a book I expected to enjoy: Tom Bingham's The Rule of Law. Only a few pages in, Bingham (seeking to refute Dicey and other predecessors' distinction between the role of the common law in protecting individual rights in Britain, and the dependence on the constitution for whatever limited rights individuals enjoy in other cultures) says:
Although the 'rule of law' is, obviously, an English expression, familiar in the UK and in countries such as Ireland, the United States, Canada, Australia and New Zealand, whose law has been influenced by that of Britain, it is also meaningful in countries whose law is influenced by the jurisprudence of Germany, France, Italy, the Netherlands and Spain. In Germany for instance, reference is made to the Rechtstaat, in France to the État de droit, which literally translated, mean 'the law-governed state'.
"Bureaucracy is not an obstacle to democracy but an inevitable complement to it."