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The Oil Price Collapse, & why No-One Starves in the West.

Two years after the fall of Soviet Communism, a visiting Russian official seeking to learn about how free market systems worked, asked the Cambridge economist Paul Seabright “Who is in charge of Bread Supply in London. He was astonished by the answer: “No-One”.

No-one has starved in a free market system since the Potato Famine in Ireland in the 1840s, which happened because of the failure of a staple crop, and despite significant Government initial efforts to alleviate it. The free market failed there, for a huge number of reasons but that remains the only example, and much has been learned since. Many of the other famines in what were nominally free-market systems, like the Bengal Famine of 1943 can be put down directly to interventions in the markets such as the (democratically elected) Punjabi Government preventing the export of food to Bengal, whose other major source of food, Burma, was having a little local difficulty which became known to history as World War 2. Because of this intervention by the Punjabi government in the market in response to shortages, and subsequent inaction by the Indian Government, over a million people died.

The oil price rose throughout the ’00s in response to the rise of Chinese demand, lower interest rates and increased car use in the developed and developing world. Then people started to hurt. Oil price protests rocked the world. The cost of maintaining subsidised petrol in the non-petro-state middle-east is one of the sparks that lit the ‘Arab Spring’. In the west, cars got more efficient as the price (and taxes on petrol) rose. People bought smaller and more efficient cars. Highway speeds fell, as cars started to have ‘fuel economy’ displayed on the dashboard and people realised how much more it cost to drive at 90mph than 70. People changed their behaviour and drove less: ‘Peak car’ was in 2005 in the USA.

Meanwhile, engineers went looking. We had long known about ‘Tight oil’ (oil soaked into porous shale or tar-sands), but it was expensive to produce, and uneconomic to extract, until the prices rose. And when they did, engineers sought means to improve production efficiency. And they were successful. The spike of Oil prices in response to cheap money and the recovery from the credit crunch led to an enormous explosion of production in Texas and North Dakota in particular. The USA became the world’s largest oil producer in 2013. Cost of tight-oil production in Texas is around $40 and falling. In much of the traditional reserves in the North Sea, it’s $35.

There is the equivalent of five Saudi Arabias worth of reserves in the Eagle Ford shale in East Texas alone. (1.25tn Barrels of Oil Equivalent vs 255bn BOE) . And it is ALL economically viable to extract so long as oil remains above $50 per barrel. And there’s the Bakken in North Dakota and others. Peak Oil? Um… no.

So the response to a temporary shortage of Oil was for people to use gradually less in response to a price signal, and for people to go looking for more, in response to the same price signal. And the result is the glut of Oil the world is currently enjoying as oil that was prospected when the price was $120 is now hitting the market. My guess is we can expect $45 or so and then stabilisation around $50-70. Having got used to Oil at twice that price, it will feel like a tax cut for the world. (Except Nigeria, Venezuala, and Russia…).

What is true of Oil – the price goes up when demand exceeds supply – is true of wheat, and pork bellies, and olive oil, and corn or Tea. And the substitutes, barley, chicken, rape-seed oil, Sorghum, coffee, and so forth get used instead. People economise and substitute. So long as the market remains, it will become increasingly profitable to move stock from places of low value to places of high value where things are scarce.

Even the much-maligned speculation, or what used to be called ‘hoarding’ helps, by creating a reserve  in anticipation of higher prices to come, to be released onto the market in response to shortages. Hoarding ensures the commodity is always available at a price. And so no-one starves.

And the lessons: how to grow crops or burn fuel more efficiently, cannot be unlearned. So when supply returns, prices often collapse, the speculators often get badly burned, but the economy as a whole is richer as a lot is being done more efficiently.

Ah… I hear you say… but what about Africa: how can Africans pay the same prices as Europeans? But 21st century famines in Africa are almost never SUPPLY problems, but DISTRIBUTION problems. This isn’t about cash-crops being removed even as people starved, like Ireland in the 18th Century. We in the rich west are not taking African food because we can pay more, indeed quite the opposite. There’s often plenty of food, grown in the region or supplied as Aid, but due to poor infrastructure or more often, war and banditry, it cannot get to where it is needed. Where the rich west is holding Africa down is by preventing much of the continent from developing a cash-crop economy. The Africans are actively prevented from supplying our markets with cheap food by rich-world Farm subsidies, So roads aren’t built, and when the crops fail, food cannot get in from outside, either in response to rising prices or even Aid. Aid which often as a by-product, destroys the livelihoods of local farmers by undercutting them.

The European Union, USA and Japan, to name the most egregious examples have their boots on the face of Africa, keeping him down, but not in the way you’d think. African farmers cannot compete against our heavily subsidised farmers and so cannot invest or develop their production, even if they wanted to. The market for the end product isn’t there. Without that bottom rung, the rest of the development ladder is much harder to climb. Then, by demanding Africa opens up their economies to everything, except the one thing they have a comparative advantage, African economies struggle to compete and struggle to develop.

The fact Africa now contains some of the Fastest-growing economies on earth is a testament to the triumph of the human spirit in the face of adversity. Imagine how much better it’d be if we’d not retarded African development by to appease French farmers’ selfishness. Every famine since 1840-41, everywhere in the world is BECAUSE, not despite a Government somewhere intervening in the market. And the same is true of poverty. The African governments and their trade partners who’ve worked this out are doing well. But it took millions of lives, and is still not widely understood.

Rising prices are merely the means by which no-one starves and the pumps still have petrol. Would you rather we ran out occasionally?

On the Legitimacy of Strikes

My good friend Joel compares the turnouts in Strike Ballots with the turnouts in elections. Obviously, it’s ridiculous to say a person “was elected by 25% of the electorate” when 50% of those who voted voted for him. Abstention is a legitimate democratic choice. The same is true of strike ballots. Perhaps 30% of members return their ballots. Of whom there might be a majority in favour of strike action. This doesn’t mean the “strike is supported by 15% of the members” to take the rather dishonest Tory line. What is more reasonable is the line taken by the Tory MP on the Today programme this morning, who said in an election, everyone affected can vote, and can choose not to. However a strike affects people who do not have a vote.

The Union barons are whining that Margaret Thatcher’s evil anti-union legislation, which demanded postal ballots for strike action is preventing high turnouts. Why, they ask, can’t there be work-place ballot boxes? Had anyone bothered to look at why all-postal ballots are insisted upon in the legislation, they would know that it is a measure to prevent intimidation by Union organisers in the workplaces. Who would oversee those secret ballots? The Union reps, who would then be tempted to influence the result…. 
What the Union Barons want is for people to turn up to work, and vote on a strike ballot overseen by the union, so the union members can be subject to the same intimidation and thuggery that they were in the good-old days of the 1970s, which increases union power in negotiations with “the Bosses”, supposedly for the benefit of the workers, but in practice so the Union barons can feel all important.
Strikes, though romanticised by the Union movement and the broader left as part of the “Workers Struggle”, have actually achieved very little in the way of improvements in pay or conditions. What has driven pay and conditions is productivity and investment. What a strike does is encourage the bosses to fire people and, where possible, employ machines. The people running the machines will be paid well enough so they regard themselves as one of the bosses, and so don’t strike.
The very point of a strike is to impose costs on the bosses, and broader society so that the monopolistic power of employers can curtailed, and the rewards for labour are more evenly shared. But employers don’t have monopolistic power any more. Educated people especially don’t need Unions, because there are plenty of people hiring. UK unemployment is low thanks, in part, to flexible Labour markets that allow people to be taken on “on risk” because getting rid of them should they turn out to be unsuitable is not too costly either for the employer or employee. The idea that “bosses” still have the power, absent any legislation or unions, to drive down pay and conditions in a “race to the bottom” is risible. The strike then, is a 19th century solution to a 21st century problem. 
The problem is not bosses beating up on the poor, downtrodden worker, but the workers in safe, secure jobs, pulling up the drawbridge behind them. Every time there’s a strike, there’s an incentive for workers not yet hired to never be hired, and their wages spent on a machine instead. Or in businesses folding because the labour relations are too much bother, or not being started in the first place, because even taking on one member of staff, risks bankruptcy.
If you don’t like the pay and conditions in your current employment, get your lazy arse to City and Guilds, the Open University or whatever, and call your head-hunter. Yes, be prepared to move, if necessary. But if you want to enjoy the moral high-ground of “serving the public” in tax-funded (secure, well-paid relative to the private sector, and enjoying a gold-plated pension) public sector, please don’t expect me to have any sympathy when, following the strike, you’re outsourced to the lowest bidder. For that is the logic of strikes.
If you’re on strike, feel my contempt for your spiteful, economically illiterate, selfish stupidity. 

The Post Office IPO

Most of the objections raised in the media concerning the sale of the Royal Mail are spurious. Most IPOs get away at a discount. Investors are taking on significant risk in buying a share for which there is no established market, and therefore price. Get it wrong, and your investors lose a great deal of money. No further money can be raised by the business in future except at high costs of capital.

A lot is being made of the advice as to the price range:

At the time of the flotation, and more specifically the book-building process, there were significant threats of industrial action. This faded as the floatation day approached. At 330p, the top end of the range, the shares yielded 6% or so, which appears about right for a floatation of a regulated utility the sale of which was driving the trades union movement nuts. SSE at the time yielded significantly more than that and 5% or so is about normal. 290p was cheap but 330 looked about right to me at the time.

Setting the price too high would ensure much less demand. And there are big magnifying effects at work.

There are known problems with the book-build process. The main one is that it is inflexible should demand prove higher than expected. And it was massively over-subscribed. Politicians running round telling everyone it’s undervalued might have something to do with this. There was an immediate buzz, as everyone tried to get as much as they can. This flattered the figures for demand. Once it is clear the demand is greater than supply, this creates more demand and so on in a virtuous circle. It became clear, as I endured my busiest week ever that everyone would get substantially less than they put in for. This in turn encouraged retail customers to bid for £20,000 in the hope of getting £3000 worth, further flattering demand.

So was the demand really 24 times over-subscribed by institutions as reported by the National Audit Office? No.

If the issue was priced at £5, just over 10% below the trading range it established following the flotation, it’s unlikely, at a yield of around 4% that I’d have been recommending it to clients. There would have been no politicians running round telling everyone how under-valued it was, and in the absence of the excitement, there wouldn’t have been people putting in for significantly more than they actually wanted. The issue may have been a flop, and been pulled. The Government would have been left with egg on its face, and the price it could achieve in future may well be worse than the 330p it actually achieved for the 60% of the company it sold, if it could get it away at all. This is of course the real objection from Labour and the Unions, who simply object to any and all privatisations.

Could the Government have got more than 330p? Yes, but not much more, and at significant risk to a successful flotation.

People are objecting that institutions which took part in the flotation have sold some or all of their holding. Well why shouldn’t they if they think as I do that at 560p, at a yield of 3.7%, Royal Mail is over-priced? I simply don’t understand this fetish for long-term holders. Royal Mail is a successful flotation with a deep and liquid market in its stock and so as a result, can if needs-be raise money at a low cost of capital. Those institutions which put in for the flotation early did so at some risk. They have been paid for this risk handsomely and early, as have the 600,000 or so retail investors, many of whose holdings of 227 for which they paid £750 are worth well over £1200. I don’t regard this as a bad thing. If you think the shares were sold off cheap, you could have bought some (unless, of course you were overseas, or an MP).

Should more have been made available to retail investors? Yes. But at the cost of securing the IPO, when it was not at all clear what demand for the shares was out there. Could a different flotation mechanism be used in future – an auction perhaps? Yes but these are a great deal harder for retail clients to understand and access. And if there are to be privatisations in future, we want to allow retail clients – individual British people to take part.

These quibbles aside, the IPO was a great success, and most of the objections to it are mere left-wing cant. The risk of owning Royal Mail to the tax-payer has been reduced. You can still post a first class letter from the Scilly isles to Shetland. Private money now underpins the business, and thanks to a hugely successful flotation, the Government can, at a time of its choosing, sell some of the remaining stake for which it will get a better price. The National Audit Office made an estimate of the value to the taxpayer of keeping the company in public ownership of £1. Labour is not making much of this figure. It has been sold to people who value it significantly higher. This is why capitalist, free-market economies are richer than the kind of economy Labour MPs want: everyone is better off now the Royal Mail is privatised and no-one is worse off.

Isn’t capitalism marvellous?

McJobs, long-term unemployment and the Minimum Wage

Labour love to decry insecure jobs on low wages, of which flipping burgers for McDonalds is the archetype. The insecurity of self-employment, contracting or “zero-hours contracts” (what I used to call “temping”) is another.

It’s terrible, the lament goes, these jobs don’t pay a living wage…

There are some truths buried in the mountain of cant written on the subject. Some, perhaps even most people in “zero hours” jobs, or flipping burgers for McDonalds would rather be doing something else. Many self-employed are under-utilised, and underpaid, at least at first. This is a small truth, but a big error.

Self-employment is for example largely a self-selecting sample – those who’d rather be in another job, will continue to look for one while contracting or working odd-jobs. Of these, those who can, will get another job. Those who can’t will continue to struggle on. This leaves self-employment being mostly those who can’t cope with a job, and those who don’t want to work for someone else. The middle-ranking self-employed don’t exist. They’ve got jobs. Temping is ideal for people (recent arts graduates for example) who don’t know what they want to do for a living. And a living wage isn’t far from the minimum wage, before tax. Why are we taxing the low paid?

Nor is it  the job-market’s attitude to the unemployed. If you’ve been out of work for more than 6 months your chances of a call-back plummet. Again the lefties would prefer to blame the employer rather than look at why this is the case. Human behaviour is flexible, and people get accustomed to unemployment. So people who’ve been on the dole for 6 months are more likely to be absent, call in “sick”. The HABIT of work is a qualification in itself. Please note “more likely”, not “all of them will”. I am NOT saying the unemployed are lazy and feckless. I am simply describing how the world IS.

Another common lament is “there were 700 applications for every vacancy”. But if 600 of those are from people who’ve been out of work for 6 months or more, employers will simply file them in the round filing cabinet, and focus on the remaining 100 who will be more likely to turn up on their second day. Effectively what this means is the unemployed are not in the workforce, even though they may not have yet dropped out of the statistics into “economically inactive”. Thus the labour force is shrunk, and the bargaining power of those still in work goes up. This is, broadly the mechanism by which the European social model has ensured crippling levels of youth unemployment and a total inequality between protected, hard-to-fire insiders who can strike at will for better pay, and a youth population who will NEVER enjoy those privileges if they ever get a job at all.

The problem is therefore a dearth of jobs which can take the unemployed and give them the evidence of the habit of work,which might make them attractive to potential employers. McDonalds does this. Zero Hours contracts enable zero-risk hiring to the same end. An employer seeing a school leaver with a year’s burger-flipping might think “this guy wants to work, and now wants to get on” and offer on-the-job training. The same employer might see a graduate who’s been “looking for work” for a year as too proud and lazy to work, who’ll jump ship as soon as the city starts hiring again.

The left often lament job insecurity as a terrible thing. It is. But this is a small truth concealing a big error. First  Far, far, far worse than job insecurity is unemployment. I know of no man used to earning a wage whose relationship with wives and children survived long-term unemployment, intact. Without the means to provide men (especially men; this is less true of women) are rendered worthless not just in the eyes of their wives and children, but increasingly so in their own. Unemployment has catastrophic mental health implications. Unemployed people, and men in particular, become suddenly very much more likely to commit suicide.

Thanks to the minimum wage and job protection legislation, the kind of insecure, temporary jobs which require minimal training and make use of a casual workforce are simply not economic any more. Thanks to the bureaucracy of claiming benefits, no long-term unemployed person would reasonably take seasonal work which is why vegetable-picking is so often done by foreigners.

This is not such a problem during a long expansion. People get jobs. The minimum wage was introduced during a long expansion, has been untested in tough times. But it appears to have denied many young, inexperienced, and unlucky people who have a six-month gap on their CVs a chance of work, not just now, but ever. Many of these then handily (for Government statistics) drop out of the workforce altogether. Workfare, zero hours, low minimum wages, no fault dismissals are all decried by the left, and are all means to reduce the risk of hiring. Statutory job protection is not the same as job security; ultimately the best protection for an employee is a deep and liquid job market.

Lefties prefer to ascribe malice to people who favour supply-side reform to combat unemployment. I am not encouraging a “race to the bottom” for the benefit of “my rich banker mates and shareholders”. I just think the burden of the minimum wage is borne by those who will never get a job.

Do I want to do boring menial work for a pittance. No.

Have I done boring, menial work for a pittance? Yes.

It’s cruel to deny people the means to develop their skills. The Job-ladder: everyone’s got to start near the bottom. Some start nearer the bottom than others and some never climb very high. But lets not put that bottom step out of reach of anyone.

Academics are Left Wing because…

Chris Bertram is professor of Social and Political Philosophy at Bristol, he tweets as @crookedfootball and blogs at Crooked Timber. In Today’s post he argues that “Squeezing the rich is good, even when it raises no money“. Essentially his argument boils down to the left’s new theory of everything – that inequality is bad.

This may, or may not be the case. But the argument that punishing the wealthy ends up hurting the poor, by shrinking the pie, is not even considered as valid. There are so many near lies, distortions and pure hate for people who do things an academic political philosopher doesn’t understand, that the article is worth looking at in more detail.

However, the feature of the discussion I want to write about is the assumption, generally taken as decisive by the commentariat, TV interviews and the like, that if such a tax would raise little or no money then that should count against it decisively. On this view taxes are an unfortunate necessity, required to finance state expenditure and to be minimized whereever possible: a tax that raises no money is therefore pointless, imposing needless pain for no benefit.

The art of taxation wrote Jean Baptiste Colbert, is “maximum pluck for minimum hiss”. The top rate of income tax has been set at 40% for a generation. The rich are willing to pay 40% in a way they’re not willing to pay 50%. Thus rich people who might have settled in England to do business, settle instead in Spain where the weather’s better, or Geneva, or Monaco. At a stroke you’ve deprived the exchequer of £100,000 because you’ve asked for another £12k. For very little extra pluck, a 50p rate probably does in the long run, see the economy smaller than it might have been, and causes a great deal of hiss. No-one is better off.

But this view is just plain wrong, for several reasons. First, in a complex society structured by all kinds of institutional rules, the idea that people have full liberal property rights in their pre-tax income is unwarranted. They participate in a co-operative venture with others in society subject to certain conditions, and those conditions include one that part of “their income” already belongs to the wider society, via the state. This point, hated by libertarians, defeats the widespread view that people are having “their money” take off them: it wasn’t theirs to start with. Though I think such an argument, with some caveats, is correct, it is a second and third consideration that I’d want to rely on here.

This view seems dangerously close to the totalitarian view that all your money is the state’s except that which they let you keep. This man is a professor of Political philosophy. Be afraid. Be very afraid.

The second consideration is that inequality is deadly for democracy, and for the equal political status of citizens. Because the power and influence high earners derive from their income threatens such status equality, there is a strong public interest in constraining it, even if doing so raises no money at all. It isn’t just that the rich come to own media outlets or that politicians are swayed by their donations to parties, it is also that the prominence their cash gives them gets them listened to and taken seriously by opinion formers. Their experience matters and shapes public policy, that of an unemployed teenager in the North East doesn’t: we need to shift the balance of voice in favour of the unemployed teenager and against the City trader.

Inequality is sometimes “deadly for democracy”, because it’s often a symptom of extractive political institutions – much of Africa for EG. However that is not the case in the UK. Most people who get rich enough to pay the 45p band are not politically connected. They’re just business people. Where there is a problem, it lies in the quangocrats and state apparatchiks walking through revolving doors on huge salaries with apparently no oversight. Even worse, many of these are superannuated, (mostly labour) politicians, conducting a gramscian march through the institutions. I agree here, in the crony capitalist, and quango state, we could do with some pay restraint.

In any case, the UK is not particularly unequal. Remove London, and it’s international mega-rich, the UK is a pretty bog standard north-European welfare state whose inequality is relieved by direct transfers at least as much as it is in Germany. I fail to see how chasing the International Mega rich who choose to pay a lot of tax here, makes anyone better off.

Third, income inequality makes life worse for the rest of us in real terms. Economists are supposed to believe that utility (whatever that is) matters intrinsically and money only matters instrumentally. But right-wing economists often seem to forget this as soon as they are asked to comment on tax policy and inequality, arguing as if their theorems apply to cash and not to utility. If we’re dealing in cash terms, then a tax that makes some people worse off and nobody better off looks bad, and looks Pareto inferior. But it isn’t necessarily Pareto inferior if we focus on well-being: making some cash poorer may make some others better off, a Pareto incomparable outcome. Here’s one way how: if those on high incomes have too much, they can outbid the rest of us for goods that are intrinsically in limited supply or where supply can’t be quickly increased.

I see, he wants stuff that a political philospher would once have been able to afford, but can’t now. He seems ignorant of the fact that, in general, markets are better at relieving scarcity than making the rich poorer.

If I’m further away from being able to buy a house near to where I work, because house prices are raised in an auction I can’t compete in, then I’m worse off even if my income stays flat. Reducing the purchasing power of the wealthy is therefore good for me (unless I got hold of a house early and can earn windfall gains from the auction). And similarly for many other goods. 

I see. It’s the nice big house he can’t afford that he’s envious of, the poor dear. But house builders cannot respond to demand, because the permits to build are not being issued to cope with population growth. So prices rise. Contrast with Germany, where building is encouraged – house prices haven’t risen relative to incomes. This is a market failure which can be laid directly at the door of the state, and particularly, the left’s beloved councils. The answer is not to drag down the rich, but to ensure greater supply. And markets do this better than any other mechanism.

Unrestrained income for the wealthy also means that they can commit more of their resources to ensuring that their offspring make it to the top in the next generation, thereby harming the opportunities for the rest of society.

State education is rubbish. That is not the fault of those who can afford to escape it. But the education establishment of which Professor Bertram is part, opposes any market mechanisms which may drive up standards in state education.

I could go on and enumerate more mechanisms whereby squeezing high earners is good, even if it raises no money, but the general point should be clear. It should give Labour reasons to go on the offensive (“class war”); it certainly gives the commentariat reason to stop making their stupid talking point. They won’t, of course.

The real reason for this attitude is that the incomes of political science professors haven’t kept up with people like business owners, bankers, corporate lawyers and the like. This is pure envy by members of a profession which feels undervalued.

And it demonstrates a profound misunderstanding of who the payers of the top rate of tax are: there are a number of city traders in there, sure, but the majority are business owners, many of whom will have financed their company with a mortgage, risking their house on their business. As business owners, they often have options to pay themselves in a number of ways – dividends, capital returns, income etc… prudent tax-planning is not avoidance, but this is why the 50p doesn’t raise as much as left-wing academics, who comprehend nothing but PAYE wages, think it should.

This hostility to wealth creators (whoever they are) is simply a lack of understanding, and worse, the sneering of a profession whose people were once able to afford the houses now snapped up by people involved in mere trade.

This left-wing politics of envy, so common amongst academics is pure bitterness from a profession which no longer commands the respect (and money) they think they’re due.

It doesn’t help the poor to tax the rich so much they seek means to pay less tax. For the means by which the rich pay less tax shrink the pie for everyone.

The reason Marxism is doomed to end up murderously totalitarian is that everyone imagines themselves as the planner, not the man condemned to the salt mines to fulfil the plan. The professor of Political Philosophy at Bristol university has not grasped this simple point.

Why the 50p Tax Rate is a bad idea.

The purpose of progressive taxation is to put the greatest burden on those with the means pay more. This makes economic sense due to the theory of the marginal utility of money: a further pound to someone on £100k is worth less than a further pound to someone who earns the median wage of £26,000 or so. means you pay a greater proportion of the 100,000th pound than you do of the first. And for a quarter of a century, the British income tax rates were more or less fixed, apart from an abortive experiment with the 10p starting rate. The rich paid at a marginal 40% and everyone else paid at a reasonable 20%.

And then the Labour party looked like losing the election. And in casting about for land-mines to leave behind (something Tory administrations don’t do, incidentally…) Labour, in their last budget raised the top rate to 50p on income over £150,000 and, in a nasty, spiteful little measure, cut the tax-free allowance progressively on people earning over £100,000. The top marginal rate of tax therefore, on incomes between £100,000 and £116,000 was 60%. And simply so that Labour could have an attack line on “Tory tax-cuts for the rich while they cut services”.  They did the same trick with 90-day detention. The sheer, naked, abusive, corrupt and transparent timing of this measure takes my breath away and how they’re not excoriated in the media for it is beyond me.
Labour, however were overjoyed. They finally got their wish that a Labour government would soak the rich “until the pips squeaked”.
The trouble is, it didn’t work. The rich, you see aren’t very often on Pay As You Earn, so changing tax rates isn’t a simple matter of altering a number in a spreadsheet. The highly paid are very often in control of the exact mechanism of payment. Either as contractors, self-employed in some way, or business owners. They often have multiple income streams. There are many ways to choose the tax-year in which you declare your earnings or whether to take it as capital gain or income, or as many people I know, simply take less pay “so the buggers don’t get it”. They can increase pension contributions or invest in another business. 
All people paying the higher rate have to submit a tax-return and therefore probably have an accountant who will advise them on their options. None of this is illegal, or even contrary to the spirit of legislation, and certainly not “tax avoidance”. All you have done is taken a situation where it didn’t really pay to make a great deal of effort about the tax affairs, to one in which it did because one form of tax is so far out of whack with the rest. And so the 50p tax raised a great deal less than the £3bn expected.
I’m making no great claims about the money raised or not by this measure. The 50p rate probably raised a bit more money than had it not been introduced, at least in the short run, but not much (less than the £3bn promised). And Dropping the rate to 45% almost certainly reduced the amount raised compared to the status quo ante, but again, in the short-run, and by negligible amounts. 
In the longer run though the evidence appears clear. The revenue maximising rate is somewhere between 40% and 50%. A 50p rate is probably nudging into the downward-sloping end of the curve and this is mainly due to investment and incentive effects. It simply becomes less worthwhile, at the margin, to make the effort to get beyond £150k when the Government takes over half. And so fewer people do, many that do will shift earnings over time to less punitive jurisdictions. UK subsidiaries will be shut, or not started in the first place and the economy suffers. Business might still get done, it just won’t be done by people taxed here. It suffers not because an extra 10% of earnings over £150k is a lot of money, but because you’re attacking the people who make the decisions.

Ultimately the mechanism by which the right-hand side of the Laffer curve works is by shrinking the pie, not just for the rich who pay the taxes, but for everyone.

It boils down to this simple statement: a higher rate of 40% is accepted by those who pay it. One of 50% is not. And the people who pay it have options. But it is economically damaging beyond the simple effect on the Exchequer’s bottom line, because those who are going to be forced to pay it feel it’s vindictive. They are really, really angry about it. And for this reason, the economic and social rationale needs to be a bit better than the “Because crisis. Bankers. FUCK YOU, That’s why” that seems to underpin the Labour thinking. 
Not having any sympathy for someone on £250k a year means not having any sympathy for someone who writes a cheque for £92,627 (39%) to pay for nurses teachers and doctors. You think they should pay £102,367 (41%) instead. And if a number of them walk, to Monaco, Geneva, New York, Spain or wherever, instead of “driving them to the airport“, consider where the £92,627 they’d have paid willingly will now come from. That’s before you consider the VAT, CGT, NICs and so forth that “wanker” you’re wishing would just “fuck off” would have contributed.
This is a transparently chippy little bit of class war bullshit that will risk more damage than is worth the paltry sums it might optimistically raise. In supporting it, you’re revealing yourself to be a spiteful, economically ignorant Jack Spart, who is motivated by envy, not a desire to get the deficit down. 
Ultimately the chorus of business leaders making this point will damage Labour’s economic credibility even further, even as a grumpy electorate tells the pollsters they like the policy. The economic recovery is happening. People will not want to risk this over the next 15 months. This is set to become Labour’s new clause IV. It will not form part of the manifesto of the next Labour government.

Slavery

Perhaps slavery would have been abolished in the Americas nearly a century earlier, had the Colonists lost the war of Independence?

Most wars are about economic matters, and it’s difficult to over-state how central slavery was to the economy of early America. Yet in 1772, the Somersett Case brought before the King’s Bench which concerned a slave brought to England by a Customs official, and concluded that chattel slavery was unsupported by common law. “The air of England“, as was argued by Somersett’s council “is too pure for a slave to breathe“. Hundreds of American slaves attempted to make the passage to England and freedom following this ruling. Just four years later, the Colonists declared independence. I do not believe these facts are unrelated. George Washington was a major slave-owner as was Thomas Jefferson. Both men appeared to know the institution was wrong, but felt unable to do all that much about it.

The war of Independence was, as the US Civil War a century later, at least in part about slavery. Washington resisted free blacks in the Continental army in which around 500 served for fear of the principle it would set to slaves. America’s first Emancipation proclamation (in reality, a fairly desperate last throw of the dice by someone hoping a slave rebellion would carry the day for the Crown) was issued by the Governor of Virginia, Lord Dunmore in 1775. Thousands of freed slaves fought for the British side against the colonists. While the Dunmore proclamation may have hastened the end of slavery in the American colonies had the British won, the abolition of slave trade (1806) and the abolition of slavery in the British Empire (1833) may have had a much harder run. The abolitionists would have faced a greater array of more powerful economic interests.

It’s a comforting Narrative for the Englishman therefore that slavery was abolished in the British Empire before it was in most other European and American powers, and that having done so, the might of the Royal Navy was deployed in suppressing the trade. This does not absolve the UK, or the British Empire of the stain of slavery. While the British may have been the first power to end slavery, while the slave trade was legal, and for some time while it wasn’t, the British economy was enormously boosted by the trade in humans, which ceased when it was becoming less economically viable. The British and Portuguese were by far the biggest slave traders for over 200 years.

Around 11m (estimates vary hugely) Africans were forcibly removed over the 300 years of the triangular Atlantic trading route, of which slaves from West Africa to the Americas formed the “middle passage”. This devastated the societies and economies of the entire continent, and left much of Africa, even into the interior, a low-trust society to this day. Unlike the Black Death in Western Europe, an equivalent tragedy, which left the remaining people richer, the slave trade left societies in which people could not invest in land or technology because of the ever-present risk of kidnap. There is evidence that many tribes actually regressed, abandoning technologies such as crop-rotation and the plough in response to this onslaught. Much of West Africa is corrupt, violent and poor as a direct legacy of the Slave trade.

The societies which escaped the worst excesses colonialism and slavery, notably Namibia and Botswana, are doing much better than the rest of Africa to this day probably because their tribal institutions and societies weren’t ruptured by grotesque incentives of the slave trade. The south was poorer and remains poorer than the rest of the USA because of slavery and Jim Crow. The “special institution” has devastated Africa and left America uncomfortable in its soul following centuries of Race-laws, hate, fear and torture in the Southern states. It’s a special kind of evil that poisoned everything it touched and does so to this day.

And that’s before we consider the individual human cost. Millions of lives lost to sickness, violence, warfare and simply being thrown overboard should the middle passage prove longer than counted for in supplies. Think about that for a minute.

This may not have happened on the Tecora, on the voyage depicted in Amistad, but it did happen.

It’s not an exaggeration to conclude the industrial trade in Humans, at which the British once excelled, is a historic crime of an equivalent magnitude to the Holocaust. This is why I do not get angry when politicians talk about reparations for slavery. I am rich and free and many Africans poor, in part because of the enduring legacy of slavery.

Why am I writing this now? I read ’12 years a slave’ by Solomon Northup the movie of which is to be released in the UK shortly. The more I read, the more fascinating I find the entire grotesque, horrifying business. It’s a short book, and one I urge you to read before you go see the movie.

2014 is going to be the best year in human history.

This time last year, I made some predictions: 2013 is going to be the best year in human history. It was, for most of the world at least. And 2014 is going to be even better, for all the same reasons.

How did I do with my prognostication?

The scourge of war is receding from human experience. Though they are still going on, they involve fewer combatants and kill fewer people. As people get richer, and pass through the dangerous middle-income phase, they have too much to lose by fighting.

Alas Mali and the Central African Republic saw crises rise to the level of war in 2013. The civil war in Syria the ongoing wars in Afghanistan continue to claim lives. There have, however been no big, new wars involving western forces. We missed the window of opportunity in 2012 to prevent the disaster in Syria, and it is now too late. I suspect letting Bashar al Assad win is now the least bad option.

Several states in the US have signalled the abandonment of the war on Drugs (well Marijuana at least)

One country, Uruguay, has fully legalised it. The logic of the War on Drugs is waning. Several successful politicians in North America have been caught using Crack and Cocaine, none of whom look like junkies. Dozens of people who clearly aren’t drug-addled derelicts, self-arguing in underpasses, but who maintain busy and high-profile lives have “come out” as having taken Marijuana or Cocaine. It won’t be long before such people no-longer have to pretend to have hated it, or for it to have been a response to an emotional trauma.

In 1963, “some time between the end of the Chatterley Ban and the Beatles’ first LP” people started to admit they like to have sex, and not just for procreation. Rock & Roll became acceptable when in 1976, Glen Matlock of the Sex Pistols said “fuck” on live TV, at a stroke rendering that nice young Mr (now Sir) Michael Jagger, respectable. Perhaps a TV cook with ample curves might be the person whom we can thank for ending the hypocrisy of the drug war. Unlikely. But someone’s going to provide the moment. And soon. A wise man once said….

The world is still getting richer, even if the squeezed middle in the west isn’t.

The giant emerging economies are creating wealth at a rate unprecedented in human history, by the simple expedient of abandoning the socialist choke-hold on creative economic endeavour.

India and China may have slowed, India especially so, but the truth holds. Their Governments have seen the fruits of economic liberalism and seen it work. India may regret electing someone who seems to be an unrepentant Hindu nationalist, Narendra Modi of the BJP in 2014, but it won’t be for his economic policies which are far more business-friendly than the rather corporatist Congress party.

 The poorest parts of the world are the fastest growing. Even if inequality in the west is rising a bit, and that’s debatable, global inequality is falling. 

This is still true, but less so.

So, to carry the game forward, here are some concrete predictions for this time next year.

Money & Business
The FTSE100 will reach an all-time high, for the first time since 1999, and will continue the bull-run. 7,000 will be left behind.
Thanks to tightening money, The Oil Price will fall below $100 and stay there. The Brent/WTI spread will narrow from 99/111.

UK Politics
The Labour lead will fall from 6-8%. UKIP will win popular vote in the European parliament elections, then their support will drift back to the Tories thanks to a strengthening recovery. Scotland will vote ‘No’ to independence. Ed Miliband will remain a worthless union stooge. The voter-repelling and emetic Ed Balls will remain shadow Chancellor, because his boss is a spineless dweeb, with shit for brains and “Red” Len McClusky’s hand up his bum. Tories will post a lead, but I doubt it will be done consistently.

International
The Syrian civil war will not end, but Assad will regain control of much of the country, leaving an islamist insurgency. The world will continue to look the other way.
China’s growth will slow. The rumblings of dissent new riches have smothered will start to grow louder. The Communist Party may seek to use Sabre-Rattling with Japan to detract domestic opinion from the looming economic crisis.
Something dramatic will happen on the Korean Peninsula.

Happy New Year

There you go. My posts have been sporadic in 2013 as I have less new to say. But I still enjoy writing from time to time, and it’s nice to know my readers, both of you, are still out there somewhere and I hope, whether you come in from RSS or by a random websearch for stewardesses boobs (I still get a lot of hits that way, for reasons that are beyond me) you still think what I say is interesting, provocative, informative or entertaining.

Have a happy new year. And remember risk is to reward as hangover is to party.

What Chancellors Do and Don’t Influence

The Commons hue and cry of the Autumn Statement has died down. It was clear that at some point growth would return, and when it did, Ed Balls would be left with egg on his face. And so it transpired. There is a problem with the Cost of Living, but it started under Labour, and isn’t as bad as they make out now. Yes wages are falling relative to inflation, but there’s plenty of other factors at play, as I pointed out to Andrew Neil, yesterday. Labour’s narrative completely ignores things like changes to taxation which have offset it. Living standards fell in 2007,2008 and savagely in 2011 but have subsequently returned to growth.

For Labour to make a song and dance about Gas Prices is particularly egregious as most of the rise is due to either taxation or a rise in the wholesale price, neither of which the utility companies can do anything about. Good politics. Lousy economics. Of course this…

… is going to have a bigger positive effect on living standard than anything a chancellor might do. A strong pound, a result of the UK’s economic stability (our debt is now cheaper to insure than the Americans’ – AA not withstanding) is an unalloyed good thing, but this won’t stop the BBC is going to start with its mercantilist wibble about exporters suffering.

The cycle of rise and fall in GDP is like breathing. Investment happens in 7-10 year cycles then there’s a fallow couple of years as malinvestment is purged. Gordon Brown thought he’d ended boom and bust, but that turned out to be hubris. The mechanism by which ‘the great moderation’ happened, the Greenspan put, actually made the crisis when it happened much, much worse. Recessions are like forest fires in Mediterranean climates, not only natural, but vital to the regeneration of the species that live there. But if you try to prevent them, you allow build up a thick scrubby undergrowth that when it does burn, destroys the productive part of the wood.

So George Osborne is claiming credit for the recovery. He’s as wrong to do so as Ed Balls is for blaming him for the stagnation post 2010. But that’s a standard lie of politics, widely repeated because I think chancellors believe it themselves. But that does not make what Osborne is trying to do wrong. Every post-war recovery is associated with spending cuts, but if you listened to Labour, only state “support to the economy” can create growth.

The fact is state spending takes resources, not just tax, but people. If all the quality graduates are becoming social workers and diversity co-ordinators, they’re not starting small businesses or working in manufacturing. It’s no surprise that when the state stops hiring, good people find something else to do that doesn’t involve standing in the way with a clip-board.

State headcount has fallen faster than at any point since demobilisation at the end of WW2. State spending is high, when you include debt service, welfare and pensions, but the discretionary bit is lower than at any point since (I think) the 1950s. And this is as it should be. Money transfers like pensions & welfare increase overall utility and don’t take money out of the economy. Indeed the poor have a lower marginal propensity to save than the rich. The bit that does take money out of the economy, worthless state apparatchiks has fallen. The economy is bearing a lower burden of unproductive state prod-noses.

So you have commentators saying the recovery is unsustainable, that it’s the wrong sort of growth. But these are the same people who said austerity was self-defeating and who confidently predicted a triple-dip. The truth is the economy’s not that amenable, at least in the short term,  to manipulation by chancellors. And in the long run the economy’s not even amenable to Federal Reserve Chairmen. This recovery will last a few years, then we will have another recession. And it won’t be the chancellor’s fault then either.

What this crisis and the recovery shows, as if any more evidence were needed, that economies function best when the state enables, but does not do, and otherwise keeps itself as out of the way as possible. Carry on George. You’re doing a good job.

You Don’t have to be a ‘Climate Denier’ to Hate Wind Farms.

For the record, I accept the scientific consensus about Anthropogenic climate change. I also accept the economic consensus about what we should do about it (CO2 pigou taxes, etc…). The political “consensus” that we all need to put on a hair shirt, tax ourselves into penury, provide enourmous subsidies to wind and give up the advantages of modern life, because “the environment reasons” is just Watermelon nonsense. It’s an attempt to stifle capitalism by people who’ve never liked it, but who now use a different excuse to demand capitalism shut itself down. Dialectic materialism has been replaced by dialectic environmentalism, but the prescription is the same: economic planning. They were wrong last time, they’re wrong this time.

There are many things we can do to make our energy supply less polluting. And we should pick the low-hanging fruit first. In the UK, much of our energy (39% at the time of writing) comes from coal. Much of this could be replaced with lower-carbon, cleaner, safer Natural Gas. This will require widespread fracking but will allow the UK’s CO2 footprint to go down quickest in the short-term. If you are going to go with wind, Gas can be cranked up and down quicker than coal can.

But it’s not even clear Wind Turbines are good for the environment, even in Narrow CO2 Terms. Turbines have high embedded energy: they have to replace an awful lot of coal to justify the CO2 used in their manufacture, taking over a year to ‘pay back’ the energy used in their manufacture. Solar Photo-Voltaic generation is tumbling in price. It will not be long before such power generation will be competitive with fossil fuels, without subsidy. At this point, everyone will be mad to not have a solar panel or two on their roof. Instead of letting the market do its work, Government has done its usual job of picking a winner, littering the countryside with unsightly, noisy, unpopular, expensive, vibrating wind-farms, next to which those politicians will not have to live; but by which they will force others to live in order to demonstrate their “green” credentials but the cost of wind energy is NOT falling. These wind farms will never produce cheap energy.

In Germany, where they have a lot of wind power, when it’s windy it overloads the network and barely have sufficient base-line capacity when it’s not. On a cold, still day, without French nuclear capacity, Germany would suffer blackouts. Today, it’s windy, they will probably get 60% of their energy needs from wind, and will not find a market for their Gas-produced power (much of which must stay on all the time…). This distorts the wholesale energy markets across Europe.

Wind turbines kill birds. I am pissed off by this, even if you’re not.

The much touted subsidy (a price guarantee) for recently negotiated for new nuclear capacity is about a third that given to wind power, though it lasts longer. Subsidy is money taken from the surplus generated by productive endeavour, and given to unproductive endeavour and is unarguably a bad thing. This is what the market finds out and the market is working -Solar feed in tariffs are falling as the price of cells falls and their efficiency rises. It has long been accepted the up-front costs of nuclear are so vast, state guarantees are needed for new capacity to be built, but it seems likely Nuclear will be competitive, if the wholesale energy price rises at least in line with inflation as it has in the past. Wind however doesn’t generate useful electricity at an affordable price, even where it’s enjoyed massive investment and has an arguably net negative effect on the environment. People will pay to not be near them.

So, assuming you want to cut your CO2 output, 1) switch to Gas and Nuclear for base-line power. 2) encourage Solar PV generation. Encourage biomass CHP projects. Wind is an expensive, stupid, ill-thought out sideshow; an economic basket-case which has absolutely no chance whatsoever of solving the energy problems of the 21st century. There are much more effective technologies: Predictable Tidal flow, less intermittent wave power, solar PV rapidly falling in price, Nuclear for the base-load and one-day solving everything, fusion power.

The most important thing to ensure a good environment is that the economy grows healthily. If the economy is growing, people will feel they have a surplus to spend on luxuries like “the environment”. And at this, the eco-mentalists will squeal “but the environment is not a luxury”. It is, if it’s a choice between a job and a windfarm people will choose the former. Most reject the latter, even when they’re feeling rich. When times are tight, the people will demand an end to environmental costs and foreign aid. Central to anything looking like a healthy economy is the absence of subsidies, though there is a case for time limited price guarantees to “encourage” development of technologies, this would better be achieved by a simple emissions tax on the polluting power rather than the complex levies which distort the energy markets at present. Look at the economic mess Egypt is in where Governments  are struggling to Govern largely (though not entirely) over the issue of state fuel subsidies which make up 12% of GDP. Such subsidies have a habit of growing like a cancer. Germany is in a similar boat with its enormous subsidy to wind power.

Wind turbines have costs paid by rural dwellers (especially feathered ones) for the green consciences of urbanites. They make no economic sense, and little environmental. Let’s follow France, whose nuclear power stations keep Europe’s lights on when the wind’s not blowing, and in the meantime, FRACK BABY FRACK.