Stepping back

Lots of comments about how exchange rates and equity-price movements show that the UK is (a) doomed or (b) well-placed post-Brexit. Movements and values over a few days tell us nothing except the climate of hope or fear in those few days. How do things stand on a broader perspective? Let's compare:

A. Currencies: USD vs GBP vs EUR

B. Markets: FTSE100 vs FTSE250 vs Dow vs DAX

Hot air freight

Carbon-capture and storage (CCS) is already one of the biggest political lies around. The Government is poised to grant permission to the development of several coal-fired power-stations, so long as they are "CCS-ready". They don't actually have to do any capturing, just be capable of having the carbon captured. My car is capable of having the carbon captured. It's doing it that means something. This is just a fig-leaf, to allow the Government to permit installations that they know are important to our future energy-security. I wouldn't have a problem if they'd just be honest. It's the attempt to greenwash it that makes me want to vomit.

One of the many problems with CCS is that it is energy-intensive, which means it reduces the net efficiency of power stations (possibly by as much as one-third), which means that you have to use a larger amount of fossil fuels for the same amount of power supplied to the grid. Not exactly a smart response to over-dependence on fossil fuels.

But that's not wasteful enough. Now, the Sunday Times reports, they are not just looking at capturing and liquefying the gas and sticking it in the ground (crossing their fingers that the acidic, pressurised, liquid CO2 doesn't dissolve the rock and leach out). No, that would be too simple. Now they are looking to capture it where there is nowhere to store the liquid CO2, and stick it on boats to travel halfway round the world (or whatever distance it is from Japan to the Middle East), to store in spent oilfields.

They won't be able to use existing tankers, because these ships' tanks will have to be kept cooled and pressurised. That will need energy (i.e. fossil fuels), not just at loading, but all the time the ship is in transit. And it's not obvious what return-loads they would share. So, in the name of reducing our carbon footprint, we will have boats sailing halfway round the world and back to bury a gas that will probably leak out again, and for which we don't have remotely enough storage capacity to last more than a few years, before the process becomes redundant.

Naturally, CCS is hugely popular with policy-makers the world over. In the UK, Labour, Tories and LibDems are racing each other to bid up the number of projects that should be backed. The EU is throwing money at multiple "demonstration" projects in many different countries (isn't the point of demonstration projects that you only have one or two and then go commercial?). And Obama thinks it is the magic bullet.


Pricing the future

There was a flurry of triumphant snorts on Friday when some libertarian blogs picked up a post from earlier in the month, which had commented on the recent paper by William Nordhaus on carbon-pricing. The ASI got it from voluntaryXchange, who got it from Newmark's Door, who had spotted the original post at ReasonOnline. The excitement was because Nordhaus, described variously as "perhaps the world's leading expert on the economics of climate change" and "the economic expert on global warming", had done some modelling of the optimal profile of carbon-pricing, and had concluded that, as the ASI put it, "the suggestions of both the Stern Review and Al Gore don't cut it". Rather, Nordhaus estimates that the optimal level in 2010 for the price of carbon is $34 per tonne (tC), equivalent to around 9 cents per gallon of petrol (i.e. bugger all in the grand scheme of things).

Just a couple of points:

1. Apart from the original article (Reason) they conveniently forgot to report that Nordhaus was not advising a static price, but one which should increment in real terms by around 2.5 per cent per year, to $42/tC in 2015, $90/tC in 2050, and $207/tC in 2100. Those later prices would be felt more keenly, if it weren't for the likelihood that they will be dwarfed by higher fossil-fuel prices by then.

2. More importantly, although Nordhaus's paper dresses the analysis up in a great deal of elaborate academic clothing (and very much more substantial clothing than Stern and Gore, it has to be agreed), it all pretty much boils down to the usual culprit - the discount rate. If, like Stern, you believe that it is wrong, on moral grounds, to discount the costs of future disaster, then you choose a very low (almost zero) discount rate and end up with enormous present costs for future risks attributable to global-warming, and therefore a rationale for taking strong, immediate action based on a high present cost of carbon. If, like Nordhaus, you believe that close-to-zero discounting is irrational, you set a modest discount rate which, over the timescales over which the impacts of global-warming might be felt, reduces the present costs of even catastrophic events to quite low values and results in a steady-as-she-goes policy prescription.

The funny thing is that both Stern and Nordhaus can present simple illustrations that demonstrate the irrationality of the opposing perspective. Stern can say, as paraphrased by Nordhaus, that "a positive time discount rate would lead societies to ignore large costs that occur in the distant future." In other words, if one combines economists' willingness to put a value on life with a modest discount rate, one can end up with a low present value for the deaths of even millions of people sufficiently far in the future (and thanks to the wonders of compounding, not that far into the future). It follows that it isn't worth doing much now to avoid large numbers of deaths, even if our actions make those deaths inevitable, provided that those deaths are not too soon.

On the other hand, Nordhaus gives his "wrinkle experiment" illustration of the absurdity of Stern's use of minimal discounting. "Suppose that scientists discover a wrinkle in the climate system that will cause damages equal to 0.1 percent of net consumption starting in 2200 and continuing at that rate forever after", he muses. "How large a one-time investment would be justified today to remove the wrinkle that starts only after two centuries? Using the methodology of the Review, the answer is that we should pay up to 56 percent of one year’s world consumption today to remove the wrinkle. In other words, it is worth a one-time consumption hit of approximately $30,000 billion today to fix a tiny problem that begins in 2200."

So we have two competing approaches, both of which yield absurd results. Should we just choose the version of absurdity that we prefer? Or argue that, in medio veritas, the truth must lie somewhere (but who knows where) between two absurd positions? Or should we stop and consider whether the problem lies with what these two approaches have in common?

What this is telling us is that we have reached the limits of the usefulness of mathematical economics. Though it came to dominate economics over the course of the twentieth century, it was always a dead end. Now we see exactly how sterile and ridiculous is the idea that you can model human action with numbers and formulae. Climate-change theory turns out to be the perfect reductio ad absurdam test of neo-classical, welfare economics. And it fails.


Tax reduction priorities

Mark Wadsworth (whose blog is one we recommend in our blogroll) managed to get a long (by their standards) letter published in yesterday's FT, criticizing John Redwood's focus on reducing corporation tax, when in Mark's opinion greater emphasis should be placed on reducing VAT and National Insurance (NI). Well done for getting published, Mark. You are half right.

You are right that some taxes need reducing more urgently than corporation tax, and that NI is one of them. On the other hand, Redwood is nevertheless right that we need to cut corporation tax (if not as a priority above other cuts), and you are wrong about VAT as a priority.

I say this with some confidence, because I happened, the day before, to be browsing the latest version of Taxation trends in the European Union - Data for the EU Member States and Norway, from Eurostat, the EU's statistics office (yes, I am that sad). The figures in there do not support Mark's argument in its entirety.

EU corporation tax ratesCorporation tax needs cutting because, although our biggest competitors have higher rates, we are not only in competition with them, but with the 20 other European countries that have lower rates than us. Not to mention the BRICS countries, and other developing nations. Your principal competitors change according to who is competing most aggressively. The best way to lose your competitive position is to focus complacently only on your old competitors.

(Having said, that, one does need to be careful about what one means by "competitiveness", as Samuel Brittan, pointed out in yesterday's FT. But the conditions that influence where businesses choose to invest and to book more or less of their profits does seem a legitimate area for international tax competition.)

It also needs cutting because high rates of corporation tax distort investment decisions, as companies structure deals and decide their levels of borrowing and saving in order to minimize their tax bills rather than because of the fundamentals. And because experience in countries (particularly in Eastern Europe) in recent years suggests that high rates are at an inefficient point on the Laffer Curve, and that cutting rates to below our current level can increase (or at least, not significantly reduce) revenues.

EU consumption taxesAlthough the comparisons for consumption taxes indicate that the UK's rates are already pretty competitive, it would be misleading for me to suggest that we are in competition over rates of VAT in the same way that we are in competition on corporate tax. Most of us do not have much option to go to another country to consume our goods. The costs of doing so are likely to be very much greater than the tax benefit. Nevertheless, it does raise doubts as to whether further reductions in VAT should be an urgent priority.

VAT does not have much impact on costs of production, thanks to the offsetting of VAT on purchases against VAT on sales. It is effectively a tax on final consumption. Apart from the case of one-to-one transactions involving personal services (e.g. paying in cash for your gardener or cleaner), it is relatively unavoidable. Nor is it so high (at 17.5% nominal, 11% implicit, i.e. taking into account lower rates and exemptions) that it will be deterring significant levels of economic activity, relative to other taxes whose rates are significantly higher. Consequently, a reduction in VAT is likely to have a near-proportionate impact on tax revenues - there is unlikely to be a significant Laffer-Curve benefit.

Mark argues that "VAT does not just increase the price paid by the consumer; it also reduces the net price received by the producer. Thus low-margin producers are forced out of business and output is reduced quite significantly." Well, yes, it will be a bit of both, though the combined effect will remain 17.5% (or whatever rate of VAT applies to the good). The balance between one and the other will depend on commercial decisions, which will be heavily influenced by price-elasticity of demand. If demand is inelastic, producers should be able to pass on most of the cost to consumers without dramatically affecting volume, and therefore profits. If demand is elastic, producers will have to choose between passing on the costs to consumers and accepting a lower level of demand, or absorbing the cost to maintain volume, but reducing margins/profits. Their balance of fixed vs variable costs will play a significant part in that decision.

The net effect, as Mark says, is that some marginal products are not brought to market, the volumes of some other products are reduced, and the prices of goods that are essential or at least strongly desired, are higher than would otherwise be the case. But this is not different in effect to other taxes. Corporation tax also affects either the level of profits or the price at which the company's goods must be sold in order to deliver the return on investment necessary to persuade people to invest (or retain their investment). At the margins, it will also cause businesses not to be setup or to divert their funds into more profitable activities, which reduces the range of products available and the volume of transactions, and increases the price of goods for which demand is inelastic. And income tax and NI increase the cost of producing goods with a significant labour input, causing fewer of those sorts of goods to be produced and increasing the cost to consumers of essential, high-labour goods. All taxes have this sort of effect - it is a question of striking a balance between their impact on the economy and the need to raise revenue. In that regard, 17.5% (or 11% on average) on consumption could be expected to have a less significant impact than 28% on profits or 40-50+% on employment.

EU taxes on labourIt is that latter figure that seems a particularly strong disincentive to something particularly desirable. NI, of course, is part of the tax on employment, and the most regressive part at that. I am in agreement with Mark on this, and yet the European figures once again do not appear to support us. The only countries in Europe with lower implicit (i.e. weighted average) tax rates on labour, including income tax and employer/employee social security contributions (SSCs, i.e. NI in the UK) are the tiddlers of Greek Cyprus and Malta. It seems that the UK government is taxing labour relatively lightly. Moreover, our SSCs are a relatively low proportion of the whole (less than half the average) compared to most of our neighbours, whereas our income-tax rates are higher than average, which might suggest that NI isn't even the place to start if one were reforming UK taxes on labour.

And yet, it is still true that our employment taxes are too high. Eurostat knows it too:

"Despite the presence of a number of low taxing countries, taxation on labour is, on average, much higher in the EU than in the main other industrialised economies. The effective tax rate on labour in the United States was estimated at just 23.9 % in 1999, compared with an EU-25 ITR of 36.3 % for that same year. Carey and Rabesona (2002) estimated a 24.9 % average effective tax rate on labour for the United States in 1999, i.e. 12 percentage points less than the estimate for the EU-15; the difference with Korea (13.9 %) was even more than 20 percentage points. Values for Japan (23.0 %), New Zealand (23.0 %), Australia (25.3 %), Canada (30.3 %), and Switzerland (31.1 %) were far below the EU-15 average, too. Martinez-Mongay (2000) found broadly similar differences between the EU and the United States and Japan. Indirectly this is confirmed by OECD data on the tax wedge."

And that's just the industrialised countries. The comparison with the developing nations will be even less favourable.

In this case, like corporation tax and unlike VAT, there is an element of international competition, as labour can move, if not as easily as capital. We see the effect in the inflow of Eastern Europeans to the UK at the moment (they could equally have gone to Sweden rather than Britain or Ireland, but the numbers were proportionately lower to the high-tax country that opened its doors) or the numbers of French already here, and the outflow of Brits to countries like Australia and the USA. The only country with higher taxes (and then not much, and not in terms of the proportion paid by the employee) to which there are major flows of Brits is Spain, and most of those are going there to retire.

The universal impact of taxes - of preventing some goods being produced, of reducing the volumes of other goods, and of pushing up the price of goods for which demand is least elastic - applies to taxes on employment as much as any other. But it manifests itself in specific and particularly harmful ways. The goods that are not being produced or are produced in lower numbers or are being made more expensive (without the producer benefitting) are jobs. The only way that high employment can be balanced with high taxes on employment is if people are prepared to accept a lower level of take-home pay. But as take-home pay has a significant impact on the sustainable level of demand in the economy, even that would not prevent high employment taxes from having a deleterious impact on the economy and people's wellbeing. And in practice in Europe, there is strong resistance to rebalancing levels of pay to take account of the cheaper labour and lower taxes that can be found elsewhere. The result is predictable and borne out by experience - high unemployment and low growth.

We may look smugly at the relative, official levels of unemployment and growth in Germany, France and the UK and believe that we are doing better than them. But while we undoubtedly have been doing better on average than those of our neighbours who have been slowly strangling themselves for the past decade or more, we are not so much better as the official figures might suggest. Our (un)employment figures are massaged by moving an incredible number on to disability benefit, and our employment figures are entirely dependent on the vast number of additional public-sector jobs (for which demand is unaffected by employment taxes because their "customers" - taxpayers - have no option until election-time but to pay the extra) that have been created since 1999. Worse still are our effective, marginal rates of tax (taking account of means-tested withdrawal of benefits), which provide a strong disincentive for those on benefits to seek work, unless they can jump straight into a high-paying job. We may only be mutilating rather than strangling our economy, and hiding our self-inflicted wounds better than our competitors, but it does not diminish the long-term impact, which is that competitors from outside Europe are catching us up or leaving us behind.

The first priority is clear, and I don't think would be in dispute between Mark, John Redwood and myself (though it would appear that Redwood's party, like the others, would dispute this). We must reduce the size and cost of government as much as possible, so that we are able to reduce the burden of taxation in general. But it will not be possible to reduce taxation to a level which has little impact. Priorities have to be chosen with regard to where the burden of the state should fall. As that burden is effectively a disincentive, it is, in significant part, a question of what one is least reluctant to disincentivize: jobs, profits or consumption (to limit ourselves to the three options considered by Mark). Though it is not ideal to discourage any of these, it seems to me that the least harmful of the three to deter is consumption, then profits, with employment being the least desirable thing to penalize. As things stand, the priorities are in exactly the reverse order. Redwood would rebalance it in favour of profits. Mark would rebalance it in favour of employment and consumption. I would rebalance it in favour of employment and, to a lesser extent, profits.

It seems that Mark and I agree on one other thing, though - perhaps more important than the levels of taxation, to complement the emphasis on reducing the level of tax on employment. Nominal rates are all very well and a worthy target for reduction, but what really matters are effective and marginal rates. This brings into play other factors, such as personal allowances and benefits. In comments on Mark's post, Vindico (a fellow individualist whose blog is now added to our blogroll) suggested that a flat tax be combined with a Basic Income (BI) to achieve a more efficient balance of effective and marginal rates of taxation. Mark agreed enthusiastically, and so do I.

I have been trying to promote BI as an efficient, liberal, compassionate alternative to welfare, and not necessarily a left-wing policy as many seem to assume, for some time. All reforms of the tax system, fiddling with the calculations for means-testing benefits, and sounding tough about forcing people back to work, will have little effect on the draconian levels of effective, marginal rates of taxation on low-earners that keep many of them out of work. Only a Basic Income can solve this. It is a sine qua non of genuine tax and benefit reform. If UKIP were to make it part of their programme, as Mark says they are considering, they would gain at least one more supporter.


Bloody hell!!!

Global coal production, 1971-2006

Can we finally stop pretending that cap-and-trade and our other half-baked "carbon-pricing" mechanisms aren't simply offshoring our carbon?

Global coal production has increased by one-third in 3 years (and by over 50% since the turn of the millennium). Three-quarters of that increase is attributable to China.

Back in 1973, nearly three-quarters of the world's coal was produced in the OECD or the USSR. China accounted for less than 20%. We're producing nearly two-and-a-half times as much now globally, of which just over a third (35.3%) comes from the OECD and the former USSR. Nearly half (46.2%) of this much bigger total is produced in China.

And they're using pretty much all of it themselves. They export only 2.5% of their production. Their exports have actually declined in the past three years (from 93Mt to 63Mt), even as their production has rocketed (from 1,502Mt to 2,481Mt). And their imports have increased over the same period. At 37Mt/year, they are now the seventh-largest importer of coal in the world.

At this rate, all the coal in China will be gone in 46 years.* And that's if they stop adding to their consumption right now. As that graph indicates, they are showing little sign of slowing down. We know they are building a coal-fired power station (or two) a week. And they haven't stopped building factories either. If they carry on like this, they'll have used up their coal within 30 years. They'll have a massive infrastructure dependent on coal-burning whose costs have only partially been recovered, and will be dependent for fuel on imports at a scale that suppliers cannot begin to supply. Great plan!

But of course, this isn't purely for their own benefit. Whilst a decent share is going to internal development and consumption, a large share also goes to the production of (usually cheap and nasty) goods for exporting, much of it to the OECD. And despite dumping most of our energy-intensive production on the Chinese and importing many of the nick-nacks we either used to produce here or never realised we needed, we manage to carry on increasing the amount of energy we consume within our own border, and yet persuade ourselves that we are somehow virtuous because our direct energy-consumption and emissions are increasing less quickly than they otherwise might have done, and than they are doing in other parts of the world.

So don't blame the Chinese - they are just responding rationally to the incentives. Why the hell we want to create incentives to do this, though, I can't imagine. Scrap Kyoto and EU-ETS now, before they do any more harm.

Graph and figures from the IEA's recently-published booklet, Key World Energy Statistics 2007 (and the earlier, 2004, version).

* Chinese reserves based on figures from the 2007 BP Statistical Review of World Energy. According to BP, despite the rampant extraction, Chinese reserves have not changed an iota between 2003 and 2006. Now, I can understand that additional discoveries or reclassification of previously uneconomic reserves may replace worked reserves, but so precisely that the figures are identical every year?! I think not. It appears that BP cannot get recent data on Chinese reserves, and are therefore sticking with the figures they've got. In which case, there is every likelihood that real reserves are lower than given in their latest publication, and they will run out sooner.


Index of Economic Freedom

The Heritage Foundation has recently brought out the 2007 version of their annual Index of Economic Freedom. This assesses and scores countries according to their performance on a range of factors, and then combines them to provide an overall score for each country's degree of economic freedom. Full details can be found at the excellent website - - that now accompanies the book.

A couple of things leapt out from an initial scan of the analysis:

  1. The top seven countries (Hong Kong, Singapore, Australia, USA, New Zealand, UK and Ireland) were all Anglophone.
  2. The way in which the Freedom from Government category was calculated - primarily based on tax revenues as a proportion of GDP, but also taking account of the scale of nationalised industries - yielded improbable results, such as the suggestion that countries such as Zimbabwe, Burma, Venezuela and China are relatively free from government, which would be news to the inhabitants of those countries.

With regard to the latter point, the authors do not claim that this category is anything other than it is. The title is perhaps a misnomer, probably better replaced with "Size of Government". Even that alternative title would not reflect the possibility that a government (for instance, the pre-war National Socialist government of Germany) could dominate, through direction and enforcement, all activities within its borders without having to own much or tax much. One should bear in mind, when considering the numbers, that there are many incalculable factors such as this that simply cannot be taken into account, but the method of calculating that which is calculable is set out clearly, and the reader is free to use the numbers so derived to whatever ends they see fit. The conclusions of the authors of the Index might need putting into context, but they are not invalidated.

With regard to the former point, the dominance of those countries whose political and economic systems derive from the Anglo-American model does not necessarily indicate the superiority of the model. Prima facie, it proves only that those economies value the same things that the authors of the Index value, to a greater extent than other cultures. Nevertheless, it is interesting to note the greater correspondence amongst this group than amongst other groups, such as members of the European Union, who are supposed to share cultures and economic models. In fact, the wide gap between the scores of liberal countries such as Britain and Ireland, and those of illiberal countries such as France and Italy (respectively in 45th and 60th place, with such economic giants as El Salvador, Armenia, Uruguay, Georgia, Botswana and Bahrain above them) probably does illustrate a real gulf in the philosophies of members of a club aiming for ever closer integration on the spurious grounds that there is an homogenised European social and economic model to which we all aspire. Whatever the rights and wrongs of the different philosophies, it is clear that culture, language and historical friendship are stronger ties than geographical proximity, and that the Anglophone countries could more easily work together on a shared philosophy than they could with their geographical neighbours.


Chavez: I am the state

The re-elected Venezuelan president, Hugo Chavez, yesterday announced his plans to nationalise the main telecoms company and the likely nationalisation of a power company. The announcement is part of President Chavez's pledge "to radicalise his administration during his new 6-year term and fully convert Venezuela into a socialist state (FT)."