Why governments' attempts to pick winners produce more losers than winners.
My copy of Dan Hannan and Douglas Carswell's book, The Plan, arrived today. Haven't read much yet and don't agree with all that I've read, but all the same, if you haven't got a copy, you should. It's well worth the read, and more right than wrong.
Something struck me about a graph of voter turnout in UK general elections, early in the book. It looked like Conservative wins were generally on higher turnouts than Labour wins. I thought I'd check.
What follows is not strongly statistically significant, but it's not insignificant.
My impression was confirmed by the figures. Since the war, the average turnout at elections where the Conservatives won was 76.4% and when Labour won was 72.5%.
In collating the figures and looking for an explanation, some other trends suggested themselves. The Labour vote appeared to be much more consistent than the Conservative vote. And indeed it is. The standard deviation in the Conservative vote is 1,932,000, whereas the standard deviation in the Labour vote is 1,393,000. The standard errors from the linear regression lines show similar but even stronger outcomes (1,955,000 for Conservative, 1,224,000 for Labour).
And even this overstates the variability of the Labour vote, due to two extraordinary performances (one good, one bad) in 1983 and 1997 (the reasons for which are well known and not representative of Labour's performance under normal circumstances). Without these two, the standard deviation in their vote is only 1,122,000, whereas you can take the two most extreme performances by the Tories out of the equation and the variability of their other performances would still be such that their standard deviation would be around 1,600,000, much higher than Labour's all-inclusive figure.
The consistency of the Labour vote made it relatively easy to spot another trend. Their vote is heading quite remorselessly downwards (with the exception of 1997), even as the voting population increases. So, statistically, is the Tories' vote (though marginally less so). But in the Tories' case, this trend is dominated by their dismal performance in the last three elections, again for reasons that are well known. Taking those performances out of the equation, the Conservative trend is somewhat upwards, whereas the Labour trend remains unremittingly downhill.
Some highly-speculative conclusions suggest themselves to me.
Unless the Tories self-destruct or Brown gets his economic miracle, this highly-speculative, statistically-weak analysis hints that Labour may be about to get drowned by a democratic tsunami greater even than the media have been starting to suggest.
Good on the British people. It may be slow progress, but it seems that each time we give the socialist alternative a chance and discover what a disaster it is in the long-run, a few more people learn the lesson and don't forget it again. They may still be susceptible to all sorts of woolly, interventionist, paternalist nonsense from wet, one-nation Tories, but at least they have recognized that the socialist snake-oil doesn't work. I haven't felt so optimistic in a long time - not about the political options that we have at the moment, but about the fundamentally-sound economic sense of a good swathe of the British public, despite all the best efforts of our intellectual class. It confirms my belief that British voters could be persuadable to support a genuinely-economically-liberal party, if one were to present itself to them.
This week's Spectator includes an article by Elliot Wilson about nuclear power and Barbara Judge, one of the great-and-the-good, chair of the UK Atomic Energy Authority (amongst many senior roles), and wife of Sir Paul Judge (he of The Jury Team). The article contains the following passage:
"If there's a model to follow, it is the French one... In the wake of the first global energy crisis, the goal was to find ways to wean France off Arab oil... the plan work[ed] blindingly well - four fifths of French energy needs are now provided by 59 nuclear plants..."
I have written to The Spectator, quoting this passage, and pointing out that this is yet another repetition of the nuclear lobby's lies on this subject.
According to the International Energy Agency, nuclear energy provides 43 per cent of France's Primary Energy Supply, and 17 per cent of their Final Energy Consumption. Oil provides 33 per cent of their Primary Energy Supply and 49 per cent of their Final Energy Consumption. Their consumption of oil has reduced by 3 per cent since 1970. Over the same period, consumption of oil in the UK has reduced by 17 per cent.
France's lips are still wrapped firmly round the petroleum teat. Nuclear energy is not a substitute for oil. But when have the nuclear lobby ever let the facts get in the way of their propaganda?
Mr Wilson has made the classic mistake, on which various rent-seekers in the energy sector rely (including the wind and solar lobbies, as well as the nuclear crowd), of failing to distinguish between electricity and energy. It's not the first time this fundamental error has appeared in The Spectator, as in many other parts of the media. It's a particular favourite of Michael Portillo and Bernard Ingham. But journalists who are not aware of this basic distinction ought not to be writing on the subject.
Coincidentally, Sir Paul also has a track record of "economy with the truth" on this sort of subject - in his case, providing misleading claims about BA's carbon-offsetting facility. Perhaps it's a conjugal thing.
Many of the more delusional, socialist contributors to the Claverton Energy group of energy fantasists (as I labelled them previously to their founder member's apparent offence) are persistently and vehemently opposed to "growth". See, for example, a recent exchange of half-baked ideas on the subject of "Olduvai theory". But to be fair, this sort of nonsense is at least partly provoked by the frequent exposition of the opposite extreme: the naïve promotion of growth at all costs (popular amongst our political elites).
Of course, neither side bothers to define what it means by growth, and it struck me that the concept seems to be singularly ill-defined, at least in the context of popular philsophizing. At best, it seems to be mostly useless in its vagueness, and at worst, it seems to be the cause of much confusion and misunderstanding, leading to economic and philosophical errors, and hostility between groups who mean different things by the same term.
What these Clavertonians want is a shift to a more "sustainable" way of life (and energy system in particular). There's a whole other can of worms in the term "sustainable", but let's imagine for a moment that we could all roughly agree on what it meant. And let's say that the Clavertonians persuaded most people to share their preference. The economy would become more focused on sustainable goods and less focused on unsustainable goods. The share of sustainable goods in the economy would increase. Increased demand for and supply of these goods would cause not only their share of the economy, but the economy as a whole to grow (unless inhibited by bureaucratic inefficiencies). Growth would be synonymous with improved sustainability, rather than antithetical to it, as these Clavertonians perceive is the case at the moment. Would they still oppose growth in those circumstances? If not, why do they oppose growth per se now? What they really oppose is not growth, but the undervaluing (as they see it) of sustainable goods and the overvaluing of unsustainable goods. But starting from this misapprehension, they fall easily into other economic fallacies and socialist delusions.
Conversely, the "growth at all costs" crowd are pandering to mirror-image delusions. Some of them focus on GDP growth, forgetting that some things that are harmful to the economy and to people's welfare, such as monetary inflation or expansion of the bureaucracy funded by deficit spending, can give a short-term boost to GDP. Simple population-change can give a distorted impression - mass immigration will probably increase GDP even though it may not be beneficial to most people, but if we were to try to counteract that by referring to GDP per capita rather than plain GDP, we could be fooled into thinking that high mortality (whether natural or artificial) can be an economic blessing.
Others confuse growth with consumption, and seek any means to stimulate consumption (whether or not our propensities to consume and to save are reflected in a sustainable balance of spending and saving, or have been distorted by government policies) because they perceive that resumed growth hinges on resumed consumption, and that our general prosperity and wellbeing hinges on resumed growth. Actually, where (as in recent times) we have had substantial malinvestment and an imbalance of spending relative to saving thanks to unwise government action (or inaction), we need a period of creative destruction, rebuilding of savings and consequent reduction in spending, in order that the economy can return to a more realistic and satisfactory balance (until the next time that governments decide to screw it up).
Growth is not necessarily good or bad. It is the nature of the growth that matters. There will be many shades of opinion on what constitutes "good growth", but to oppose growth per se or promote it willy-nilly is like opposing or promoting discipline. A world in which there is no discipline and everyone does exactly what they want (the law of the jungle) would be chaotic and dissatisfying to most, but a world where the need for some discipline is abused, perhaps by an authoritarian power, is intolerable. The virtue of particular instances of discipline or growth depends on whether they enhance or reduce people's scope to move from a less to a more satisfactory condition.
And for that, there is no satisfactory metric, whether we are talking about discipline or growth. GDP is not a meaningful proxy for the latter, even for a "first-order approximation", nor is any other econometric index. Instead of approaching this with the objective of trying to measure the immeasurable, we should approach it from a philosophical or systemic perspective. We can say that, if we create the conditions that provide the greatest scope for people to move to a more satisfactory condition and be protected from unwarranted impositions by others, then the developments that proceed from those conditions are as "good growth" as it is possible to encourage, without trying vainly to put a figure on it.
According to the Guardian:
"The government will today demonstrate its willingness to exert influence over Royal Bank of Scotland and Lloyds Banking Group by announcing £1bn of lending to wind farm developers whose schemes have been becalmed by a lack of cash... The £1bn cash arranged by the government is part of the additional £4bn of EIB lending to support UK energy projects announced in the spring budget."
This brings together several threads I have been following recently: the Government's coopting of EIB funds for their political objectives, the hype, ignorance and political-preference surrounding wind power, the resurgence of "industrial policy", delusional confidence in some quarters about the returns from and security of investments in "green technologies", and the disaster for the effective operation of markets that was the bale-out and nationalization of our most incompetent financial institutions.
Why should the banks prefer one technology over another? Presumably, they should look critically at the business models for projects of all kinds that fall within the EIB's objectives, and disburse the money on the basis of the credibility and suitability of the proposal, not simply on the basis that it uses a technology that the Government seems determined to favour almost to the exclusion of other, often more practical, alternatives.
It's utterly corrupt and stupid. And the Tories and LibDems wouldn't do much different, also having been blinkered by VILE-company rent-seeking.
This is our money they're burning, and our freedom they are destroying. How long before we can have a political option that takes government out of where it doesn't belong? Or (as some people whose political judgment I respect have depressingly concluded) is it hopeless? Must we resign ourselves to continuous decline into a patronage state, where success is achieved not by anticipating correctly and providing efficiently what people need and want, but by influencing governments to implement policy in your favour?
Who will speak for those of us who are aware of the lessons of history and know what that latter world brings? How do we fight it?
UPDATE: By coincidence, I was sent a link today to an article on EIB funds being used to bale out a bankrupt project for a Belgian offshore wind-farm. Financial services are only going to get more politicized and corrupt in the current climate.
According to David Kidney, Energy Minister with responsibility for fuel poverty, the Government has "spent £20 billion helping people in fuel poverty since the year 2000" (it's near the end of the interview).
At 3.5 million, the number of homes in "fuel poverty" in 2006 was significantly higher than it was in 2000 (see graph from DEFRA's UK Fuel Poverty Strategy 6th Annual Report 2008), and that was before prices went really high.
Is it possible that the Government's strategy is not working? Have we wasted a colossal amount of money trying to encourage improvements to energy-efficiency and usage whilst keeping domestic energy prices as cheap as possible? Is fuel poverty a bogus concept that gets in the way of rational energy policy?
Or is £20 billion to make things worse a good return on investment (to use the Government's favourite word for spending)?
Here's a graph from the Renewable Energy Strategy, of a type that the Government has been growing increasingly fond, as it steps up the complexity of its efforts to calculate outcomes and costs of support policies:
The first and most important point is that it is remarkable how precisely the Government believes it is possible to predict the costs of achieving the 2020 target. But let's nevertheless play the game of pretending that these figures are worth applying some critical thought to.
It is amazing how much the marginal resource costs of various technologies within the three sectors cluster together. One would have thought that one of the fundamental features of marginal costs is that they vary across the piece, and don't proceed in a few large steps. For example, it seems that there are no opportunites for renewable heat that incur marginal resource costs of between £15/MWh (the second, dark-blue block) and £70/MWh (the eighth, mustard-yellow block).
Perhaps I am holding them to too high a standard, and the mustard-yellow block is (for example) intended to contain all potential renewable-heat projects with marginal resource costs between £15 and £70/MWh. But in that case, why does the chart distinguish consecutive blocks of transport energy with marginal-resource costs of £20, £35 and £40/MWh (approximately, see the third, fourth and fifth blocks in the graph)? Couldn't they all have been lumped together like the 10% (mustard-yellow) heat block, or the 24% (sixth, salmon-coloured) electricity block? And doesn't this contradict Government policy on support mechanisms, which tries to tailor the support-level to ensure that projects all get only just enough to make them viable (projects of each technology being consistent in cost and the Government's knowledge perfect).
The Government intends to rely on renewable electricity to meet the largest part of its renewable-energy targets, and for wind and other intermittent generators to supply most of that renewable electricity. To be precise, they have produced the following graph (p.44) indicating what they think the capacity of the various renewable-generation technologies will be in 2020 compared to last year:
Of this, output from the wind (onshore and offshore), some of the wave and tidal, and most of the small-scale projects will be inconsistent and unpredictable at more than short timescales. That makes up around 32 GW of the capacity envisaged for 2020.
Here is a graph of how our demand for power has varied over the past week, from National Grid's realtime data-display facility:
The vertical scale is in megawatts (MW, of which there are 1000 to a gigawatt, GW). As you can see, the peak demand last Sunday was around 34 GW, and demand at night-time is under 30 GW. So, even if we hypothetically switch everything else off (the nuclear, gas and coal-fired power stations, and the more reliable renewables like bioenergy and hydro), on a windy summer night we may be producing more power than the total demand in the country. And this is only a hypothetical, because much of that alternative capacity cannot just be run up or down to suit the weather patterns.
Conversely, under an anti-cyclonic system in winter, we may have minimal wind output (5% of capacity across the country) and demand of 58 GW or more. The unavailability of around 30 GW from intermittent renewables will not be helpful. The other technologies will want and need to charge very high prices at this time, as they will have to recover their capital and fixed operating costs over fewer periods when they can export, as they will be displaced by wind (etc) for a fair amount of the time.
But this is not good enough for the Government. It is altogether too unambitious. From p.41 of the Renewable Energy Strategy:
"In particular, in the case of offshore wind, our ambitions are for much greater levels of deployment than shown in Chart 2.3. Discussions with the offshore wind industry suggest that far higher levels may indeed be possible. Estimates of what is achievable are nearer to 20 GW and the Strategic Environmental Assessment recently undertaken for offshore energy indicates that a further 25 GW is feasible by 2020, in addition to that already deployed. In all cases, the estimated contributions for each technology in this lead scenario are in no sense an upper limit on our ambitions."
Note 30: "The figure of 25 GW relates to new capacity (on top of existing plans for 8 GW from previous leasing Rounds) in the UK Renewable Energy Zone and the territorial waters of England and Wales, in water depths of up to 60m. The Scottish Executive is in the process of assessing the potential for an additional 6.4 GW in Scottish territorial waters, which is subject to a separate SEA."
So that's 8 GW from previous rounds, plus 25 GW of new capacity around England and Wales, plus 6.4 GW around Scotland, plus the 14 GW of onshore wind already assumed and around 5 GW of other intermittent projects. That's 58.4 GW - coincidentally almost exactly the same as the highest level of demand achieved in any half-hour period so far this year. So 99.9% of the time, on a windy day under an "ambitious" scenario for the Government where all this capacity is developed, we would be producing more power than we could use, even if we shut down all other technologies. And for a good part of the year, there would be a risk of producing more than twice as much as we could use.
But that's just a detail. Governments can't let details get in the way of their ambitions.
For connoisseurs of government tripe on energy and the environment, the last couple of days have been like a banquet. The releases of the UK Low Carbon Transition Plan, the Low Carbon Industrial Plan, the Carbon Reduction Strategy for Transport, the Renewable Energy Strategy, the Renewable Energy Financial Incentives consultation, and the announcement of the new "eco-towns" are such a smorgasbord of cant and delusion that I am struggling to digest them all. In the long-run, they should provide tasty morcels of insanity for weeks to come, but in the meantime, here are a couple of choice cuts that others have spotted, just in case you missed them:
That'll do for the starters. Now, what shall I have to follow...
Just came across a post on Richard Murphy's blog (via Bishop Hill and Tim Worstall, who have both been laughing at a more recent contribution from him) that claimed to show that cutting public-sector jobs would cost the government more money than it would save. For him, this means that we should increase public-sector employment to deal with the government debt problem. I have posted a comment, but I don't know if it will get moderated away, so I thought I would stick it up on here as well, just in case...
You appear to have demonstrated that welfare provisions are more generous than we can afford, and that the combination of tax and withdrawal of benefits creates a very high effective rate of tax on those just above the mean earnings level.
By your maths, someone with gross pay of £25,000 has a disposable income that is £7,365 higher than someone who is earning nothing. That is an effective tax-rate of over 70%. Not great reward for the effort involved. No wonder public-sector employees don’t cost us much more than the unemployed - but is that something to write home about? What you are saying is that we don’t reward people doing work much more highly than people doing nothing.
Your conclusions do not necessarily follow from this calculation. One might equally conclude that we need to rebalance our tax and welfare system so that effective and marginal rates of tax are lower and people are better rewarded for work.
A couple of weeks ago, I went to a drinks party for a Climate Campaign organized by the Conservative Energy & Climate Change team. The crowd was amiable enough - mostly pin-striped types with a leavening of tweedy country squires and the odd celeb, as one might expect. But the level of bullshit was off the scale. And I'm not principally talking about the politicians, though there wasn't much substance to their words. I am talking about the guests - the people the Tories are talking to and apparently listening to on energy and climate policy.
One squire told me about the Energy-from-Waste (EfW) project that was planned for his neighbourhood, in which he was involved. This was not any old EfW project. It was a full-blown, cloud-cuckoo, mad-hatter's EfW project. Though located in the sticks, it was going to take twice as much material as the giant EfW plant that has just been built near Heathrow. It wasn't going to use conventional technology (like the Heathrow project), but gasification - a technology that people have been trying and failing for decades to implement commercially to run on waste. And this was not "vanilla" gasification (which is unproven enough for waste), but a particularly high-temperature version known as plasma technology. It wasn't just going to take municipal solid waste (MSW - the stuff in our bins), but waste straw and other agricultural residues and energy crops (which was where the squire came in), despite the fact that this plant would be located around 30 miles from one of the biggest existing straw-burners in the country, which had so distorted the market for waste straw when it was commissioned that it had pulled in material from a 150-mile radius. By some magical means, it would produce absolutely no waste by-products at all - not a tonne of char, tar or contaminated recyclate would need to go to landfill. And this, I have since discovered, was the scaled down version - it was originally intended to be twice as big, using technology from a different supplier (who had never built one before to demonstrate the commercial and technical feasibility of the concept). But most worryingly, though this fantasy project using unproven technology was expected to cost £200 million (according to the squire; £250 million, according to my subsequent research), they already had three-quarters of the funding in place, and had funders falling over themselves to provide the final 25%. Or so he said. I don't know if he had been fooled, or if he was trying to fool me, but someone somewhere was being kidded in a big way.
But perhaps he was just a lone fantasist. Or so I hoped until I spoke to a pin-striped type who ran a green-energy investment fund. I suggested to him that his difficulty would be finding enough projects that were solid enough and offered a good enough return to satisfy his investors, and that as a result he might have to be settling for less than ideal average returns. Not so, apparently. It seems that the world is awash with attractive, solid, green-energy projects, to the extent that he was confident of averaging 24% returns. That is some performance, when one considers that none of the renewable-energy companies that I am aware of is delivering figures like that, nor indeed many companies of any description. "Carbon prices" are low, support for mature technologies is being reduced, and estimated costs of immature technologies are being repeatedly increased. T. Boone Pickens has just knocked his plans for the biggest wind farm in the world on the head because he couldn't make it stack up, despite levels of support that have been making America the favourite country for new wind developments. Nothing in the world of green energy or the wider economy gives grounds for optimism, and yet this fund-manager was confident of returns to make a speculator blush.
But what was really concerning was the type of fund he ran. He claimed his fund acted as a middle-man to bridge the gap between pension funds and green-energy developers. If he was telling the truth (a big "if"), the money that he was taking to invest in these mystery projects, was money that ought to be invested in the safest, dullest investments available. But instead it was going into high-risk (whatever he claimed, you don't get 24% returns with low risks) green-energy projects promising returns that no experienced developer in the sector would believe remotely feasible.
Perhaps the room was just awash with fantasists, and the finance was not in reality so easily available for their fantasies as they claimed. In that case, we need "only" worry about the sort of advice that our probable future government is being given. This tone that there is easy money to be made in energy and climate change, and that the City can deliver masses of investment, profit and jobs in the sector if suitably encouraged certainly chimes with the Tories' policy pronouncements in this sector so far.
But just possibly, people in the City really believe this (as well as the Tories). The room was certainly throbbing with optimism. And there were a lot of pin-stripes there. And you can certainly find reports prepared by consultants that could justify this sort of delusion, if you were ignorant enough of the practicalities that you believed the consultants' bullshit. Could these people be representative of a City view that genuinely believes, despite never having built anything real in their lives, that longstanding technical obstacles, energy-price volatility, and sovereign risk from inadequate, badly-designed, micro-managed, government interventions, are details that can easily be overcome through a combination of their cash and their genius?
One of my new socks has a hole in it already. That's no surprise. Nowadays, at least one of each pair that I buy usually develops a hole within weeks. Or I buy size 10-12s and within a couple of washes, they are down to a size 8 (I am a 9). It's the same with new boxer shorts: fly button gone within a week, shrunk within two, and ragged within a few months. My new shirts seem to have a tendency to develop holes at the elbows, lose buttons, and shrink, like my old shirts never did. Trousers quickly develop holes where trousers never should.
Being a cheap-skate and (as a married man) not too worried how I look down to my grundies, I am still making my old socks and boxers do duty as well. They may show their age a little, but they are still hanging together - few holes, buttons still there, still fit. Old trousers don't get so much of a look in thanks to an expanding waste-line, but old shirts still do duty and soldier on dutifully without needing repairs.
In my subjective impression, there has been such a deterioration in quality of off-the-peg clothing over the past two decades that it barely matters whether clothing is two decades, two years or two months old - it's a moot point which will need replacing soonest.
When discussing indices of price or progress, economists like to talk about hedonic valuation - the improvements in performance (due, for example, to modern technology), which are not reflected properly in changes of prices over time. The classic example is computers, where prices have been quite stable since the early big gains, but the processing power that you get for your money has increased exponentially. If we use raw computer prices as a component of price inflation, they have been a stabilising or modestly deflationary influence. But if we adjust the contributions of computers within the index to take account of their increased ubiquity and power, they are a strong deflationary force - a given unit of processing power costs a tiny fraction of what it used to.
Yet this example has always irritated me. Hedonic valuation refers to the increase in utility that derives from improvements to a type of good. I cannot say that I get twice as much utility from a computer with twice as much processing power. In fact, in recent years, increased processing power seems to have been dedicated mainly to providing the cycles to allow for irritating bells and whistles that actually reduce my utility (the Office paperclip, anyone?). Perhaps, if I were still running Windows 95 on a modern computer, I'd appreciate how much faster it ran. But of course, generally Microsoft won't let me, and finds ways to force me to upgrade. And anyway, would I really care that steps that took 100 ms in 1997 now take 10 ms?
You could see this in a couple of ways. Maybe the hedonic gains from improved hardware are genuine, but they are compensated by the hedonic losses from the bloated, glitchy software that fritters away the hardware improvements. On this basis, there is a good case for viewing the Microsoft monopoly as one of the most pernicious inflationary forces in the modern world. Or maybe we should treat them as one (you can hardly use one without the other), and attribute a limited net hedonic gain to the combination (most core computing tasks - writing, calculating, communicating, researching - are little better than 10 years ago, but some things, like improved graphical capability have brought genuine increases in utility). Whichever, we can say that hedonic valuation is most often used to exaggerate the benefits of the modern world.
As my socks demonstrate, it seems to me that we might usefully apply the logic in reverse. If the price of off-the-peg socks has stayed fairly steady, but the service that one pair of socks would have given a decade ago needed three pairs of socks to do the same job three years ago, or ten pairs of socks now, shouldn't we say that there has been powerful inflation in sock values, on a hedonic basis? Likewise for other clothing items. It seems to me that this is a germ of an idea that goes some way to explaining (along with the increasing gap between earned income and disposable income due to high levels of taxation and property-price inflation) the dissatisfaction that people feel with modern life, despite the statistical evidence that we have been getting progressively better off.
So I started thinking what other things in our life showed significant changes in hedonic valuation.
Can we get one thing straight? Administration and liquidation do not destroy productive assets or viable jobs. If the assets can be put to profitable use based on any valuation down to a penny, they will be put to that use, unencumbered by the debt that had weighed down on them, as the company emerges from administration or the assets are offered for sale at liquidation. If they are not even worth a penny in that process, then the value had been destroyed before the company went into administration or was liquidated – either because the market changed (i.e. people no longer valued the products to whose production the assets contributed enough to justify the ongoing cost of the asset), or because the managers who invested in the asset made a bad judgment in the first place. Either way, administration and liquidation offer the best way of discovering whether someone with better judgment than the existing management thinks they can make profitable use of them.
Likewise for jobs. If someone believes that they can make a profit out of the use of an insolvent company's assets, they will need employees to operate the assets. If the best use is the original use, the existing employees will be able to carry on as before (although possibly with reduced remuneration that reflects the economic realities). If the best use is a change of use, some employees may be able to retrain, and others will lose their jobs, but still others will gain jobs created by the change of use. If no profitable use can be found, the jobs, like the value of the assets, had been destroyed by the market and the management before the company went into administration.
Subsidising an insolvent company to maintain the existing jobs destroys jobs in the round, it does not conserve them. The subsidised business is continuing to do something unprofitable, requiring taxpayers' money to keep it doing that. It is destroying wealth by continuing to use the assets for a loss-making purpose, when we could be creating wealth (if a profitable alternative could be found by an administrator or purchaser) or at least not destroying more of it, by spending good money after bad (if the best that we can do with the assets is send them to the knacker's yard). The amount of taxpayers' money needed to keep the thing afloat exceeds the value that it adds to the economy (otherwise it could raise the money by other means than relying on the taxpayer). At the margins, those unnecessarily-high taxes are destroying jobs, and because the cost exceeds the benefit, more jobs are being destroyed elsewhere than are being conserved by the subsidy. Unfortunately, politicians, the commentariat, and the public can see the direct effect of the jobs being conserved, whereas they cannot easily spot the indirect effect of the jobs being destroyed, though if they stopped to think about the levels of unemployment in the circumstances where governments prop up bad businesses (usually a downturn), it might occur to them that taxes to subsidise bad businesses do not appear to be helping at a wider level.
Sorry I've gone quiet again.
Although I work in the energy industry, my greatest passion (policy-wise) is the perversity and cruelty of welfare policy and the overwhelmingly negative effect it has on our economy and the wellbeing of those it affects, rich and poor alike.
I was recently lucky enough to sit next to Shaun Bailey, and chat to him about welfare issues. Shaun's descriptions of the follies of welfare policy are powerful and authentic. However, for me, he has not yet followed his diagnosis through to the logical prescription: Basic Income plus Flat Tax (BI+FT).
I have been planning for some time to put together a website to set out a political programme, to be called Freedom and Responsibility, based on Austrian, classical-liberal, individualist principles, in which a BI+FT approach is a central plank. The conversation with Shaun motivated me to get on with it. That is what has been distracting me from Picking Losers. It may take some time (although I have already programmed the system that allows you to compare the outcome of the current system and a BI+FT system for your household's disposable income over a range of earnings).
In the meantime, here are a couple of gems that I gleaned as I updated myself on our current welfare system (I first got into the tedious detail while lying in bed with a ruptured Achilles and watching the Tory party conference on TV around 3 years ago - ah, those were the days...). You may already be aware of these, but they exemplify for me the stupidity and perversity of the current system:
The mindless, heartless stupidity of it makes me seethe. As does the equal stupidity of commentators who allow that Brown and Balls, the architects of our dysfunctional system, are either intelligent or compassionate. They are clever in the art of intimidatory politics, but utterly unintelligent, verging on sociopathic.
The choice for countries like Latvia, whose currency-peg to the Euro is crippling their economy and which have borrowed heavily in Euros, is routinely presented as devaluation or deflation. Either they must allow their currency to float (down), making their exports more competitive and imports less competitive but at the cost of making their Euro debts more expensive, or wages and prices must be driven down if they wish to retain their currency peg. Are these genuine alternatives, and is either of them a solution?
What I am wondering, which no one who posits these alternatives seems to address, is: how will they pay their debts when wages and profits have been decimated? Or conversely, if they honour their debts (whose cost of finance will be a major component of overall costs, as will be taxation to pay for increasing welfare requirements from a shrinking tax-base), will cuts to wages and prices make much of a difference to their competitive position? And won't their government deficit get even worse in these circumstances, maintaining pressure on their currency? Already, no one wants to buy their government bonds.
Isn't the reality that we long ago passed the point at which Latvian default on external debts was inevitable, and all the efforts to prop them up is simply delaying the inevitable? Massive deficits, government borrowing and (when they arrive) defaults already put them in breach of the terms required to enter the Euro. And if they maintain the fiction of exchange-rate stability, they will have to join the Euro at a level that will cripple their economy for decades. Isn't it time to bow to the inevitable, allow their currency to revalue, and start the process again at a more realistic exchange rate, if they are so foolishly determined to join the Euro?
I have just received the following invitation from AEA Technologies (energy bureaucrats who have separated but not divorced from the greater bureaucracy, and who are "managing" this aspect of the "Market Transformation Programme" for DEFRA). Truly, the EU, the Labour government and its client consultancies have perfected the art of combining menace with incomprehensible language in pursuit of illiberal and bureaucratic objectives in every nook and cranny of our lives:
We wish to inform you that Defra has just launched a consultation on Implementation of the Market Surveillance and Enforcement Requirements of the EU Eco-design of Energy Using Products and Energy Labeling Framework Directives and seeks your views and comments.
It's hard to wrap your brain around so many (upper-cased) nouns in short succession in one sentence. Nevertheless, you get the drift without reading the consultation documents that this is something to do with the application of authority in pursuit of standardization and homogenization, with the (supposedly unintentional) outcome that choice, innovation, and flexibility to circumstance will be limited.
Market Transformation indeed. Our markets are being transformed into non-markets - places where we exchange what the Government thinks is the appropriate proportion of the income that the Government thinks we are entitled to, for those goods that the Government thinks we ought to want, designed in the way that the Government thinks is best for us.
Orwell wrote about it, the Soviets implemented it, and now Western governments are following suit. Corruption of language and inversion or elimination of meaning are a sure sign of a bureaucracy that is looking to intervene in every aspect of our lives.
The core business of our family company is producing aggregates (sand and gravel) for the construction industry. I focus on our energy activities, and don't have much to do with gravel, so wouldn't normally comment on it.
However, what I have just learnt seems to have broader significance. I understand that, after a brief pick-up earlier in the year, demand for aggregates has fallen back, at a time of year when normally it would be picking up. The Ready-Mix Concrete plant that operates from one of our sites (not run by us) has just had its worst month ever, and it has been there for decades. The only demand still going strong is public-sector infrastructure projects.
Construction has always been a leading indicator of economic activity. And it is obviously linked in particular to the prospects for the property market. So the first obvious point is that this suggests that the recent optimism that the property market is close to the bottom is misplaced.
You might say that this also proves how important it is that the Government maintains its Keynesian policy of trying to pump-prime the economy through infrastructure spending. But I would look at it another way.
Just a quick follow up to my post on the Jury Team. It seems the British public have no more taste than I do for people who stand for everything and nothing. At a time when independents should benefit, and the Jury Team had had a fair amount of oxygen of publicity (including appearances by Sir Paul Judge on the TV and in national papers, and an Election Broadcast), the Jury Team seem to have been wiped out in the European elections last night. From what I observed, they never achieved more than around 8,000 votes in any region (which at a guess will amount to less than 1% of the vote and less than 0.3% of the electorate), when even obscure parties like the English Democrats, the Christian Party, and the various "real socialist" alternatives were polling many times that.
They have gone strangely silent since voting night. There's nothing on the website, and they haven't been tweeting. Could they have suddenly realised that people don't just vote for a person and some airy-fairy promises to "clean up" politics, but for the programme that a candidate espouses and has some hope of promoting?
You only had to watch their Election Broadcast, and look at the statements of some of their candidates on their home page, to realize that there was nothing there to vote for.
Superb satire from The Onion:
Staying to "finish the job" has become the favourite excuse for failures clinging limpet-like to their jobs. Alistair Darling and Gordon Brown have both used the excuse in the last couple of days. And many of our failed bankers and other business leaders have used it before that.
At what point is the job of a politician or business-leader finished? Will Gordon, at some point, say: "OK. Job done. No need for a Prime Minister any more"? Does Alistair hope at some point to put the economy into such a steady state that we can do away with the role of Chancellor?
Or are they just cringe-worthy, lying bastards who will use any form of words to justify clinging on to power and privilege, believing (probably rightly) that a big enough proportion of the media and public are sufficiently gullible or apathetic that they won't challenge them on what a load of balls they are talking?
I suggest that anyone using this as an excuse for why they should continue in their job should be dismissed instantly for evident stupidity or insincerity.
From the BBC's live blog of Gordon Brown's press conference yesterday:
1705 The prime minister says he "will not waiver and will not walk away". He adds: "I admit there have been full mistakes made and I accept responsibility."
JamboTheJourno tweets: I think Brown's acceptance of responsibility potentially gives him the opportunity to start afresh.
Taking responsibility doesn't mean what it used to, does it?
The whole country has shown that it doesn't want this unelected Brown government.
But what do the public know? Who are we to judge the Prime Minister? What matters is the Prime Minister's judgment of himself (and, to a lesser extent, the judgment of those who depend on him for their government positions):
"If I didn't think I was the right person, leading the right team, I would not be standing here... I have faith in doing my duty, in being fair to others, and in honest politics, and this is who I am... Our party cannot lead or succeed by heeding the empty and expedient reactions of the hour... I will not waiver, I will not walk away, I will get on with the job and I will finish the work."
So that's alright then, Gordon. You carry on "taking responsibility" by ignoring everyone else and reducing the country to penury to pay for your mistakes, while we figure out, if you won't listen to opinions expressed peacefully and democratically, how else we get rid of you. Your delusional faith in your own abilities and refusal to heed public sentiment may be the death of democracy in this country, but what do you care? You are in good company with other leaders who knew that their leadership was in the best interests of their ignorant, ungrateful populace. Charles I, Louis XIV, Stalin, Hitler, Mao Tse Tung, Saddam Hussein, Kim Jong Il, Gordon Brown...
"In general, if any branch or trade, or any division of labour, be advantageous to the public, the freer and more general the competition, it will always be the more so", The Wealth of Nations", Book II, Ch.II