You really can’t have it all

The politics of reality have made for a strange year.

In Germany, an improbable rainbow coalition burnt lots of coal so it could close its nuclear power stations.  Americans decided an unpopular Biden was marginally less problematic than Trump.  Vladimir Putin overestimated his attractiveness and underestimated Ukraine’s. The Brits fell out of love with their Brexit government.  And China’s Xi is finding it hard to get out of unstable lockdown and into stable growth.

Incumbents are unpopular all over the show – even New Zealand now.  But that doesn’t always mean oppositions are doing much better.

Continue reading “You really can’t have it all”

Supply chains are the least of it – labour markets signal change

It seems such a long time since our governments (well the left-wing ones anyway) were steering us deftly through the pandemic?

Sure – there were a few glitches – ‘transitory’ inflation for one.  But there was a catch-all explanation – supply chain disruption. And normal service would be resumed shortly.

But like most comfortable explanations, there seems to be a little more to it than that.

Continue reading “Supply chains are the least of it – labour markets signal change”

Liz Truss – living in interesting times

Despite the buffeting, politicians in recent years have done a surprisingly good job at seeming to be in charge.  Of course the markets and central bankers have helped them out a bit.  

So it will have come as a shock to Britain’s PM (for now) Liz Truss, that things could fall apart so quickly, and so very comprehensively. 

Continue reading “Liz Truss – living in interesting times”

Shortest tax cut in history a harbinger of our own future political difficulties?

Real change can be a profound shock.

One response is to hunt for the trigger.  Another is to point out the contrast with past ultimately-failed efforts to shore up the status quo (and marvel at all those ‘total overhauls’ of the deckchair sector).

This could be a useful framework to examine the ferocious response – both from the political establishment and the British public – to the Truss government’s start of a real overhaul.

Continue reading “Shortest tax cut in history a harbinger of our own future political difficulties?”

Britain’s Liz Truss chooses a hard road

Is the new approach to economic policy of the Truss government important. Well, just look at the overreaction.

“It has been extreme” says the mild-mannered Tyler Cowen, who goes on to add:

I certainly can see reasons why one might oppose the plan, but the skies are not going to fall.”

Criticism from many of the government’s opponents can be dealt with relatively briskly – it’s usually easy enough to pick out contradictions in their own recent testimony.  Cowen again, with admirable restraint:

Continue reading “Britain’s Liz Truss chooses a hard road”

Politician keeps promise – markets fall

They suspected that they might be electing a radical, but to their great surprise, Britain’s Conservative party members found out on Friday that they had also elected a party leader who meant what she said.

British politics may take a little while to recover.

New finance chief Kwasi Kwarteng delivered a package outside the parameters of fiscal orthodoxy, headlined with big personal and corporate tax cuts and some scary debt projections.  Certainly the Treasury advice could be summarised as ‘you’re on your own, mate’.  But then smart ministers know that anyway.

Continue reading “Politician keeps promise – markets fall”

After the mourning, the problems are back

As new PM Liz Truss leads Britain in mourning the Queen, her problems are not diminishing.

But one decision which her new government managed to implement just before the Queen’s death was the sacking of Treasury Secretary Tom Scholar.

Critics of the move dubbed him the foremost civil servant of his generation.  Naturally enough.  

But they are probably right.

What makes it even more curious is that in addition to a steely grip and overflowing ability, Sir Tom is also preternaturally likeable.  He must be the first Treasury Secretary to get on with everyone – and give every appearance of liking it.

After an all-nighter at the height of the financial crisis, he took the time to pen a graceful, lengthy, name-checked and analytically impeccable thank you note to all staff.  Before dashing off to his next briefing.  That class gets noticed.

But perhaps he didn’t get on with everyone.  The Times reminds us that Truss spent two years as a senior Treasury minister.  

The official line is the need for a break with Treasury orthodoxy.  And there’s more support for this than you might think (or perhaps not).  

For example, Eurointelligence’s Wolfgang Munchau:

“There is a modern version of the Treasury view, as exemplified by Scholar and other civil servants in his department, the view that got Rishi Sunak to raise national insurance and corporation tax. We see those tax rises as right up in the annals of bad economic policy decisions on par with the early Thatcher government’s excessive monetary and fiscal tightening as the country went into recession”

Oh. And then:

“We keep an open mind on the Truss experiment, the biggest fiscal policy expansion in modern UK history.”

But you might also think that a top-line official like Scholar, after you had rejected all his orthodox arguments, would be the indispensable man for implementing your bold and courageous (i.e., high risk) policy.

The underlying issue (which Munchau also probes) is getting to grips with the relationship between government and its advisers – poor before Brexit and now dysfunctional.

“The reason why Brexit requires civil service reform is that Brexit requires a re-write of the most important regulations the UK inherited from the EU … two years is long enough to provide the underpinnings of a workable Brexit: a re-organisation of the civil service, or at least a change in the top tiers, followed by regulatory reforms.”

Most astute.  And it will require a great deal more than sacking one of the few top civil servants who probably understands the argument.

Because much of the unhealthiness of the relationship is in the failure of civil servants to give sound advice on policy cause and effect in markets, and for ministers to demand and use it.

The UK energy crisis is a reliable example.  Governments of all stripes wanted everything: high prices to drive innovation and saving; low prices to keep energy hogs happy; wasteful and undemanding energy efficiency programmes; while skimping on energy security.

They were abetted by their advisers and rent-seeking lobbies.  Policies were generated in sequential isolation and bent to wishful thinking, without an overarching understanding that transitional energy markets would be unpredictable, and a long-term market-driven transition needed a predictable government posture on supply security and the carbon price.

If you accept this, the Truss administration’s response is not exactly covering itself with glory.

They plan to fix the current power price below market level to encourage overconsumption this winter. Then presumably try to recover the enormous subsidies with energy taxes in later years.

I suppose you could argue that this is the logical culmination of the expensive energy policy for Western countries enshrined in the Paris Accords.  

And that it sends an unambiguous signal to average Brits that power will cost at least twice as much as before, and you need to go back to heating one room and turning off the lights (that’s assuming you can’t knock down your Victorian terrace house and build an eco-apartment).

But the problem with the government’s taking full responsibility for tinkering with market adjustment is precisely its ambiguity.  Because how do you know policy stability will survive the next crisis?

Truss and her ebullient new finance minister Kwasi Kwarteng (and presumably also her next Treasury Secretary) will be hoping that avoidance of fiscal orthodoxy and deregulation of productive sectors will pay for the continued regulation of the politically sensitive.  

As Munchau says: keep an open mind.

First they came for the gas companies

In the evolution of disastrous policy, there’s often a point where a smart public figure throws his or her lot in with the whole caboodle.

Think of eminent economist J K Galbraith solemnly telling us shortly before the Thatcher-Reagan revolution that big capital, big labour and big government were here to stay with us for ever.

The Financial Times’s economic commentator Martin Wolf has long been a serious fixture in the UK media, and one with an anchor in reality.

But the European energy crisis is creating so many challenges.  And once you start down the path of tinkering, it just gets harder to stop.

Writing in the Financial Times, Wolf starts with orthodoxy:

“There exists a standard, professionally approved package. It is, as IMF staff have recently repeated, to allow price signals to operate freely and target the vulnerable.” 

End of story? Not this time.

“A rise in prices that imposes such big costs on almost everyone, while giving huge windfalls to a few producers, is something else altogether.”

And targeting help is “very hard”.

Nonetheless it’s part of his answer: namely “to cap energy prices at below the current market rates”, paid for with government subsidies, while also “simultaneously targeting assistance at the most vulnerable”.

It’s hard to see what this adds to the orthodox solution except worse incentives, extra government responsibility, and different political targeting.  And one guesses, more demand for another raid on energy producers to pay for it.

It seems inevitable that there will be a big contraction of demand at current sky-high prices – expect public libraries to be busy in winter.  So, despite bold forecasts, no one has any idea what the market price will actually be.

The two key issues are to get some additional income to the groups who will have to make the most sacrifices (and by the way be happy when they spend it on more useful things than heating their bathroom) and also to remove blockages and disincentives to supply (for both the short-term emergency and for long-term security).

The risk of tinkering – even with the intelligence of Martin Wolf behind you – is that you start to believe that a bit more spin and distributional games with the voters will solve the deeper underlying problems.  

More likely it postpones them.  And as we have seen, invites more tinkering to fix the problems created by your initial tinker.

When someone as good as Martin Wolf gets his teeth into this approach, you might be a little worried.

Certainly it demonstrates the pressures on Britain’s freshly-minted new Conservative leader Liz Truss, who faces a big decision right now. 

She has said that she doesn’t believe in windfall taxes. So you might hope she is not a tinkerer.  

But the pressures are huge, the vested interests have been getting at her, and the smart money is starting to move in favour of – a Martin Wolf-style price freeze.

It was nice to hope that Truss might be willing to sweep away the multiple distortions and vested interests of the green energy policy to provide a market consistent with energy at reasonable and stable prices; security of supply; and a not-impossibly-expensive carbon reduction track.  

But perhaps not right now.

Why Britain left

If you want a palimpset of reasons for why the UK brexited the European Union, look no further than Bloomberg’s headline:

“EU Will Propose Crisis Tool for Supply Chain Emergencies: Bloc wants ability to require certain orders be prioritized; Plan expected to be made public this month; some see overreach.”

OK.  And then the detail:

“The European Commission wants the power to force companies to fill orders within the European Union first during times of crisis, or risk fines.

According to a draft document seen by Bloomberg News, “the Commission may, in exceptional circumstances,” require companies to accept such priority rated orders of “crisis-relevant goods.””

Well it sounds reasonable.  But then:

“If they don’t, companies could face fines up to “1.5% of the average daily turnover in the preceding business year for each working day of non-compliance,” the draft said.”

Hmm. So that may be why:

“ … Nine EU countries — including Belgium, Denmark and the Netherlands — warned this summer as the proposal was being drafted that it could overstep the bloc’s authority.”

The policy springs from the EU’s well-remembered failures in coordinating the actions of its member states in the early stages of the Covid pandemic.

If enacted, the powers to suspend private contracts and direct company production would represent a remarkable restraint – and indeed control – of trade.  But arguably on the lines of the powers of the US government in similar circumstances, its supporters would retort.

What is less clear is why the combined national powers of the EU’s 27 member states to manage crisis (under the wise guidance of the EU) are not enough.

The EU policy rests on the truism that because elected national governments find it hard to cooperate, power must steadily aggregate at a higher level. So far the traffic has been one way.

Now, while the UK government dealt better with the vaccine and medical supply issues that so embarrassed the EU, many would say that since Brexit it has been no slouch itself when it comes to generating bad policy.  

But you could also argue that it hasn’t built an instrument for its creation; that it is clearly responsible when it fails; and that it is less overt in taking failure as a reason to push policy further.

And these coordination issues are not mere technical problems, they are the essence of politics.

Take the biggest issue of the year: Ukraine.

The actions of the German government (and those of a few other European countries) suggest they believe their economic and security interests are served by appeasing Vladimir Putin – up to a point.  Others very much do not. So agreement on a meaningful EU common policy is impossible.

In this instance, you might agree that’s not good. But do the benefits of a political union which would allow a single body to enforce a common foreign policy (including say a decision to go to war) outweigh the costs of political diversity in a continental union with nearly 500 million citizens?

Great exam question. Discuss.  Additional marks will be awarded for incorporating America’s 250-year examination of the pre-inclusive proposition that all men are created equal.

So Europe’s don’t-look-at-us approach is less a weakness of the European Union, and more a reflection of the diversity of its interests (even if one believes some of them to be mistaken). And conversely, a common policy will arise from shared fear of Russian political influence, rather than different political machinery.

The belief that Europe’s problems are those of political machinery and can be solved by transferring power to higher and more technocratic levels to ensure uniform outcomes, starts to assume the dimensions of a category error (although the average Brexiteer could be forgiven for only intuiting this proposition).

Therefore Europe’s more sensible national leaders will, as Bloomberg reports, perform their traditional function of curbing the EU’s more outrageous demands.

Exiled from this demanding chore, Britain’s new PM will have the less-traditional responsibility of examining and disgorging political responsibilities and associated powers which accumulated during Britain’s membership of the EU and have yet to be reshaped. This will offend many people.

And the sheer scale and all-embracing nature of this task should not be underestimated. Just look at Boris and company’s tortured efforts to reach a compromise which keeps Northern Ireland embedded in the United Kingdom without a further decisive break with the EU.

Liz Truss does seem cheerfully ready to offend many of the right people but one fears that it may take serious economic weather before enough believe it’s really necessary.

Why does bad policy seem to get worse

A little learning is a dangerous thing they say. But it can be fun.

Take history for example.  Followers of Herodotus get to admire the elegance of different theories of historiography.  One of which, surely, is that error is not necessarily self-correcting.  

Or, put in another context, bad policy seems to breed worse policy, until finally disaster brings forth reformation.

If you’re looking for examples, consider what is still (for historical reasons one hopes) referred to as Britain’s energy market.

For a longish spell at the end of the last century, there was a burst of market-led reformism.  Prices were normalised, assets and investment decisions moved to the private sector in a market framework.  Productivity benefited.

A less-obvious benefit was that long-standing issues buried in the framework of regulation – coal mining subsidies and the costs of nuclear decommissioning for example – were surfaced transparently and to some degree even dealt with.

But all good (or even mediocre) things come to an end. Often without a formal announcement.

Still, you don’t need the most acute historical understanding to see how signing up to far-reaching and un-costed decarbonisation targets might open the door to government seeking to dictate more and more energy market outcomes, with less and less regard for the long-term cost.

The long-term costs of turning the UK’s energy producers, buyers and distributors into cost-plus contractors are now emerging.

But in their concern for short-term micro-management, Britain’s politicians and bureaucrats perhaps neglected the one thing which everyone agrees they are responsible for: long-term energy security.  

As is so often the case, it’s the more baroque consumer-facing policy disasters which get the most visibility. The European energy market has a rich crop of those just now, from dependence on Russia to self-induced nuclear shut down.

But the UK’s stands out for the beauty with which consumer policy achieved all the goals it was designed to avoid.

First, a market-loving Conservative government decided to encourage market competition with lots of new suppliers selling energy bought cheap without the bother of long-term contracts.  Because customers might conceivably worry about the security of supply from these dodgy modestly-capitalised outfits, the regulators built in moral hazard by requiring customers to be bailed out by everyone but themselves.

The result, oddly enough in a competitive market, was significant variation in prices. 

That was not to be tolerated so another Conservative government brought in a price cap, to stop suppliers charging more than the market rate.

Funny thing those market rates.  As global prices went up, the new suppliers went bust and the cost of subsidising their customers pushed up the price cap.  

Which had steadily marched from £1200 annually for an average household at the beginning of the year to around £2000 now.  And it is expected to be lifted by the regulator to around £3500 at the end of the week.

We all know what the textbook answer is to market disruption of this kind: free up prices to choke off demand and increase supply; identify and compensate the vulnerable with cash (and be happy when they spend it on something other than heating their home at 22 degrees); and remove the constraints on domestic energy production (avoiding those badly-designed windfall profit taxes).  All of which is most compatible with a moderate – and stable – carbon tax.

But surprisingly few of the serious folk are saying the obvious.

Students of history might observe that growth in the pool of nuttiness does not have a restraining effect.  

Indeed recent coverage in the Financial Times suggest that the nuts are finding encouragement to go further.

So we are not surprised to find that the failings of the contemporary price cap lead to calls for full price control, or better still state allocation of energy to the needy (the Soviet Union developed a working model for this).  Even more wacky, that Britain’s last reliable energy supplier (Norway since you ask) should be morally browbeaten into selling gas below the market price because … they are getting too rich.  Well the Norwegians have for some time been saying that they have a preference for long-term contracts.

As she takes up her new post, Britain’s likely new PM might bear in mind that in addition to being the father of history, Herodotus was also dubbed the father of lies. It could help avoid the attraction of making bad policy worse. It might even reverse the trend.