Thursday, 30 April 2015

A dirty business at Longannet

A Scottish political issue, for which the responsibility lies at Westminster, is electricity network transmission charges. The present arrangements mean that suppliers pay to access the grid, and consumers face fairly uniform prices (across geographical areas) for their electricity. This made perfect sense in a world in which suppliers were indifferent about where they invested their capital (output for a given investment in a coal power station is independent of where the coal plant is). We now however live in a world in which yields on renewable infrastructure at some locations (e.g. windy Scotland) are vastly superior to the yields on the same infrastructure built at other locations. Do we now want to maintain this pricing structure? The polar opposite alternative is for suppliers to face the same grid access fees at each location, and for consumers to differentially pay for their electricity at a rate commensurate with their choice to locate either close to or far away from the fixed renewable resource. Given the current infrastructure, such a change in pricing would leave the average costs for the UK consumer unchanged, but the incentives for the purchasers of energy would be vastly different (which would of course change the infrastructure and hence the average costs after some time).

Differential consumer prices would, at the margin, provide an incentive for population movement from the congested South to the depopulated North. A larger effect is likely to be on industrial users of energy in capital intensive but low labour input facilities. Data centres, super-computers, server farms, aluminium smelters etc which do not currently get built anywhere because investment is preferentially going towards less efficient locations predicated upon patterns of existing demand, could be built specifically to consume the cheap energy produced in locations with great resources but which are far from current population centres.

Despite the relevance of this issue for Scottish voters in a Westminster election, it has not featured highly in the campaign. The SNP manifesto does say "transmission arrangements should work to support, rather than undermine, production of renewable energy in the most favourable locations", but the focus of this issue in the manifesto is to "press for a change to the transmission charging system that is penalising Scottish generators and threatening the future of Longannet power station". The closure of Longannet comes with job losses - so of course it's an emotive election issue.

But Longannet is a coal fired power station (one of Europe's biggest polluters), and by the argument above, it's appropriate for them to be cited on the basis of existing demand. So is the current pricing structure appropriate here, and hence the looming closure of the site? Stations like Longannet supply baseload power to balance out the peaks and troughs of renewable supply. It makes sense, from the point of view of minimising transmission losses, that the supply of baseload power in Scotland should equal the expected demand in Scotland less the expected renewable supply. If the closure of Longannet makes Scotland's supply of baseload electricity lower than the gap between its demand and expected renewable supply, then the current pricing structure is unreasonably discriminating against generators in Scotland. But if not, then a Scottish polity that has agreed to "ambitious commitments to carbon reduction" should be willing to let Longannet go, and focus purely upon gaining "transmission arrangements [that] work to support, rather than undermine, production of renewable energy in the most favourable locations".

End April Links

# Krugman discusses Brad DeLong's additional criteria, other than public good provision, for government expenditure in The hyperbolic case for bigger government. The collective outcome of individual long term choices is not what we might choose, so it's better for public institutions to be designed democratically to offset some of the flaws we make when making intertemporal decisions if the time period these are over is "long". This sounds reasonable to me. I would add that similar reasoning applies to the spatial dimension and there is a rationale for government due to the fact that it may be that democratic allocation of land resources could be more "efficient" (in the sense of maximising ex-post satisfaction with the outcomes) than decentralised private choices. Krugman describes the desirability of public schooling provision by claiming that we might under allocate resources to schooling because we overly discount the benefits that may be received in the very long term. Another rationale for public provision is that left to individual priorities, sufficient schooling may not be provided in my area because of the choices of others. These spatial externalities are a reason why goods like schools cannot be treated like tins of beans and left to the private sector, despite the fact that they are certainly rival (a place taken at a school is a place not available to another) and excludable (you don't have the automatic ability to gain access to schooling just because a school is there if they don't let you in), and so do not fit the definition of public goods.

Germany is imperiling the world economy by refusing to accept free money: "fixing the problem requires absolutely zero sacrifice on Germany's part. What the world needs from Berlin is for Germany to buy itself a bunch of nice shiny new transportation and energy infrastructure, or else for Germany to give itself a huge tax cut. Not only would shiny new projects and lower taxes be fun, but the message of the negative interest rates story is that by borrowing more money today Germany will improve its long-term fiscal situation." Not sure it's logically certain that it would improve Germany's long term fiscal position - but any positive return project makes economic sense if you can borrow at negative rates, and it's certainly possible that long term fiscal position is improved relative to the case with continued depressed demand and negative rates, where tax revenues likely to be lower than they otherwise would be because of general depressed environment.

# John Cochrane & JW Mason are exactly right when they say that while Greece needs to default, this is (or should be) entirely unrelated to whether is stays, or should stay, in the Euro.

# Roger Farmer says There is No Evidence that the Economy is Self-Correcting, showing that the unemployment rate seems to exhibit a unit root. As Krugman and Cochrane both say, this is ridiculous (it would have to go above 100% or below 0% eventually if that was actually the case). But I think Cochrane pretty much makes the point that Farmer trying to approximate with his model: "unemployment like other stationary ratios in macro (consumption/GDP, hours/day, etc.)  have important and frequently overlooked low-frequency movements".

# I'm in the Herald: Why the consequences of inequality really are severe

# Interfluidity's Tangles of pathology proposes that Liberalism, Inequality, and the "Nonpathology" of the lowest section of society into an despised underclass, form a trilemma: a society can exhibit 2 of these but not all 3. So the Nordic economies avoid pathology, but cannot offer a large spread in economic rewards; the US does offer such unequal rewards, but its losers are treated as an underclass.

The Swiss Have Eliminated The Zero Lower Bound!


Tuesday, 31 March 2015

End March Links

# The New Scientist says To save the rainforest, let the locals take control - I think there's a general principle involved with this local control issue

The Silk Road might have started as a libertarian experiment, but it was doomed to end as a fiefdom run by pirate kings

# My gut feel is that The Negative Way to Growth? by Nouriel Roubin [lowering rates should boost demand and hence inflation if run into supply constraints] is "more correct" than Doctrines Overturned by John Cochrane [given long run stability, low rates must be associated with low inflation, so perhaps central banks should be raising rates to get inflation away from zero]. Not saying Cochrane's made any sort of mistake in analysing the model, but I suspect the model is not a good map to the real world.

# Krugman learns something about reality from introspection in How negative can rates go?: we don't have to take the convenience values of cash or bank deposits into account once interest rates hit zero because at this point the marginal holder of cash or bank deposits is using them as a store of value rather than for their liquidity.

# I wanted to read this, I really did: The Paradox of Oil: The Cheaper it is, the More it Costs. But in the introduction it said: "it becomes clear that oil is a commodity that defies reductive analysis and which cannot be understood unless one looks through a multi-dimensional, interdisciplinary lens", and I gave up. To understand anything we need to reduce its description to its important features ("reductive analysis") - it's the only way to do it (other than simulating the real world over and over again to see how the full complex system behaves, i.e. conduct experiments, but this is often not possible). Obviously different people (especially from different disciplines) can disagree about which are the important features to consider. But this wishy-washy "we must think holistically and multi-dimensionally" pish is just an excuse for a non-rigorous verbal model (which is equally reductionist, but just not very good) to obscure more than it reveals.

# Climate change economics too often simply calculates the "social cost of carbon" and proclaims this to be the appropriate rate for a carbon tax. The impacts on incentives for replacement zero carbon infrastructure are rarely considered. So Adam Ozimek's thoughts in Dirty Energy Taxes And Clean Energy Innovation are important. However, I think the economies of scale and learning by doing points that he makes at the end are likely important enough to mean that his main point is not crucial though.

# The myth of Europe's little ice age

# Dr Jim Cuthbert on behalf of the Reid Foundation has the same concerns as me about the lack of tax hypothecation between whole UK and rUK/England following implementation of Smith proposals on further devolution to Scotland.





Sunday, 1 March 2015

End February Links

# From the Guardian, Brain drain: which UK regions hold on to their graduates?


# We live in interesting times: Something economists thought was impossible is happening in Europe (negative interest rates). And despite negative nominal interest rates being reality, George Monbiot proposes resurrecting previous monetary schemes which had structurally negative interest rates: A maverick currency scheme from the 1930s could save the Greek economy.

# Good to see English econ bloggers taking an interest in Nicola Sturgeon's anti-austerity speech.
   - Chris Dillow makes a typically insightful comment in Austerity, Fear and Bubblethink, explaining her ability to take this position: "it's no accident that one of the few prominent politicians to see things as they really are works outside the Westminster bubble".
   - Simon Wren-Lewis is a bit grudging claiming that since, in his view, independence would have been accompanied by more fiscal tightening, a sensible policy now must be hypocrisy. This is despite the SNP being fairly consistent in calling for expansionary fiscal policy since 2009, and doing more than the UK government to shift from revenue expenditure into capital expenditure within the constraints of a fixed budget.
   - Tony Yates writing in the Independent is mendacious in the extreme. He claims that an anti-austerity position from the SNP is damaging to the anti-austerity cause! In his view the SNP are so beyond the pale (an apt phrase in this context) that policy positions they espouse may automatically be deemed less credible. But they are the government of Scotland, winning a majority under PR! They are polling between 40% and 50% of the vote in Scotland. Given this, their policy positions have to be treated as fairly centrist.

# More good Stumbling and Mumbling posts:
   - In Origins of bad policy Chris Dillow points out that "in German 'debt' and 'guilt' are the same words" - I can label this as German homework!
   - Some economics in the Hari Seldon/Psychohistory mould in Created by History
   - Individual rationality versus ecological diversity, and why British politics might be due to undergo a step change, in Heading for Extinction

# Simon Wren-Lewis's Endogenous supply and depressed demand makes a fairly convincing case that, despite the UK's employment rate being back to pre-crisis levels, we may still be in a depressed economic environment, and that the appropriate policy is to loosen until we are clearly in a regime in which wage inflation is consistent with monetary targets: "after a severe recession which appears to result in a loss of capacity, you use policy to explore the boundaries of just how much capacity has really been lost, and run the risk that inflation may rise as you do so. You do not sit back, tell yourself that below target inflation is probably temporary, and do nothing. And, of course, you do not plan for more fiscal austerity."

Monday, 16 February 2015

Let clear thinking blossom

I love Lesley Riddoch's Blossom. It contains lots of ideas that I really want to spend time thinking about on the interplay between local autonomy and productivity. Eventually I may write a proper review... However, even towards things that you really like, it's often easiest to react to aspects you don't like. And I don't like the confusion between investment in human capital, and the use of capital spending as countercyclical fiscal policy. So I'm going to react...

As Nick Rowe makes clear in "Human Capital" and "Land Capital", the term capital is used to capture a concept related to time. Spending on early years' intervention, in the sense that it produces a "return" 20 years + later in the form of a more productive and educated next generation, is capital spending. Spending on childcare, in the sense that it allows parents to improve and maintain their skills in the workplace, which will boost their income into their 40s, 50s & 60s, is capital spending. No doubt about it.

However, Riddoch says "when capital investment is under discussion, childcare is rarely mentioned. ... Scottish politicians and civil servants have backed construction projects as the best way to kick start the economy, restore optimism and provide jobs. ... in 2013, Scotland's Finance Secretary, John Swinney, published a list of preferred 'shovel-ready' projects including £34 million worth of trunk road schemes, a £5.7 million revamp of ferry ports, £308 million for NHS buildings and £65 million on college upgrades. ... 2013 could just as easily have been the Year of the Soft Hat - with £394 million invested in human capital, not road junctions."

The rationale for using "capital spending" as countercyclical fiscal policy is that it can be lumpy, not that there is something magical about capital spending relative to revenue spending in terms of boosting the economy (at the margin). If the government wants to build a public physical asset which has a lifetime of 40 years, it doesn't really matter whether it does it this year or next year, therefore it is best to do it when private demand is low to stabilise overall economic activity. However, if a programme of early years' intervention is deemed valuable, then we cannot wait for the economic cycle to implement it - it has to be done at specific ages of the children. Childcare programmes could be shut down in a booming economy - but this wouldn't be consistent with expectations of parents, and would likely be very politically unpopular. The inflexibility over time of the spending decisions on such programmes means that they are very properly regarded as revenue spending programmes - even if they do build human capital.

Lesley Riddoch is absolutely correct to argue for such spending programmes, but not to present them as alternatives to construction projects for countercyclical fiscal policy: such programmes cannot be used countercyclically.

Sunday, 1 February 2015

End January Links

# Several great posts from Chris Dillow:
   - The Diversity Paradox: "there are (at least) three distinct meanings of the term [Diversity]. One is ethnic and gender diversity - ensuring that women and minorities are fairly represented in positions of power and prominence. A second is cognitive diversity - giving space to different intellectual perspectives. And a third is ecological diversity: having a variety of strategies and business models. I would argue very strongly for diversity in the last two senses.A multiplicity of perspectives ... can be a solution to the problems of (tightly) bounded knowledge and rationality; ... And ecological diversity can protect economies from shocks... In a changing environment, mixed strategies help ensure survival." He's not arguing against the first type of diversity, but making the point that the other two are very important and are given much less attention.
   - In praise of complexity economics which has a lot of good links
   - Who bears risk? "it is workers rather than capitalists who are risk-takers"
   - Heterodox economics and The Left
   - Basic Income: Some issues

# Interesting post from Interfluidity on economics of Uber: economists' knee-jerk assumption that rationing taxi-cab space using price is the optimal mechanism is, at the very least, dodgy.

# Interesting research highlighted by RES: Inequality in big cities: Why urbanisation makes the world more unequal

# I like the whimsical way Nick Rowe thinks, and his Did inflation targeting destroy its own signal? post with apples, bananas and inflation targets is a good example (followed up with A simple model where NGDP targeting beats inflation targeting)

# Some economics in the Hari Seldon/Psychohistory mould from globalinequality: Can Black Death explain the Industrial Revolution?

# The "Carbon Bubble" is in the news: Most fossil fuels 'unburnable' under 2C climate target, & Fossil fuels: The 'untouchable reserves' - I need to get my paper published!

# Simon Wren-Lewis discusses When central bank losses matter: "the effectiveness of QE is highly uncertain compared to the effectiveness of direct transfers to citizens or public works [as a means of stimulating the economy in the short run]. We seem to be stuck with an ineffective form of stimulus, because something more effective is taboo, or goes by a different name. To repeat it in a simple but more provocative way: a central bank giving money to people or governments is out of the question, but a central bank giving money to parts of the financial sector is just fine. That is a very convenient taboo for some."

Bitcoin revealed: a Ponzi scheme for redistributing wealth from one libertarian to another: "The key here is that the math problems the miners have to solve get harder the more of them there are. If there's a big influx of miners, say, because of a big bubble that pushes prices into quadruple digits, then there's even more pressure on everybody to upgrade to the latest supercomputers to stay competitive. The thing about the latest supercomputers, though, is that they're expensive to buy and expensive to run. .... So miners had to borrow lots of money to try to keep up in the Bitcoin arms race. But all that borrowing hasn't paid off now that Bitcoin prices are free falling. In fact, it's part of the reason that they're doing so. Bitcoin prices are so low, you see, that miners are spending more money running their supercomputers than they're making from new coins. So why are they still going? Well, they have dollar debts that they need to pay back, and where else are they going to get the money? They're stuck, in other words, in a catch-22: they can't afford to keep mining, but they can't afford to stop mining, either. (This, coincidentally, is the same dilemma that oil drillers who borrowed a lot during the boom face now during the bust). This has already forced one big mining group into default. And it's forced the rest to sell the only assets they have—Bitcoins—to pay back their dollar debts. That, of course, only pushes the price of Bitcoin down even further, which makes even more miners sell their Bitcoins to pay back they owe as mining becomes more unprofitable. And so on, and so on."

# Two opposing views of impact of inflation on real wages: MR asks Why is deflation continuing in Europe and Japan? and notes that "Most countries have labor market incumbents with sweet real wage deals, deals which could not be renegotiated anew today because the world has seen a repricing of labor downwards for the wealthy countries. Higher rates of price inflation would cut into those deals and thus high rates of price inflation are unpopular.", whereas Chris Dillow notes that "in the longer-run, real wages aren't affected by inflation. If they were, we could achieve higher wages by (credibly) reducing the inflation target - but nobody believes this". To the extent that expansionary policy would benefit real GDP in a demand-constrained world (without impacting upon the labour share), it has to be the case that average real wages would be boosted by inflation. But I think MR is right and there is a large cohort of incumbants who would be worse off. Rather, expansionary policy is likely to benefit the young, new hires, and the newly promoted.

It’s Scotland, Wales and Northern Ireland that can deliver the New Deal we need "the government [should] capitalise investment in the economy by buying bonds issued by regionally controlled investment banks in Scotland, Wales, Northern Ireland and the English regions. Those investment banks would then work with regional governments, local authorities, housing associations, NHS trusts and others to deliver the infrastructure this country needs. Part of that would be green green energy driven, I am sure. Part would be straight need: much of that would be housing. All would be local. And without exception it would create jobs in every constituency in the UK. This could be the economic stimulus Scotland needs on top of its new borrowing powers."

# Harry Burns say Social failure, not lifestyle, has made Scots sick "widening health inequality in Glasgow is due to the recent emergence of socially determined causes of early death. What happened to cause this? During most of the 20th century traditional industries, such as shipbuilding and steel, provided secure, meaningful employment for Glasgow. These industries declined in the 1970s as companies shifted production abroad. Skilled people left and those who remained struggled to find jobs. At the same time, communities changed as inner-city tenements were replaced by peripheral housing estates which lacked the same social cohesion. From this emerged a society with a deep sense of alienation. ... what we are seeing in Scotland is the consequence of austerity in the 1970s and 80s, when social change and joblessness led to a breakdown in family life and a cycle of alienation."

# A fantastic principle through which to think about the Greek situation: Debt restructuring: a proposed principle "there should be no significant increase in unemployment above its natural rate ... as a direct result of having to pay interest on any government debt. Unemployment above the natural rate when there is no excess core inflation is a waste of resources as well as being damaging to most of those unemployed, so any deal that creates such unemployment, or allows it to persist, should be regarded as the result of creditors acting against the social good. ... it involves creditors acting against their own self-interest, because the more of an economy’s resources you waste, the less is available to pay its debts."

Saturday, 20 December 2014

HMT says it has has no intention of allowing a workable system of real autonomy for Scotland

The IFS's David Phillips has a post at the Future of the UK and Scotland site, which like the post by my colleagues David Bell and David Eiser at Scottish Fiscal & Economic Sudies, describes the Byzantine, labyrinthine, systems needed to implement a system that maintains the Barnett Formula whilst implementing significant devolution of revenue powers.

There is a simpler way to do things: declare some expenditure items as UK responsibilities, with the others as devolved; declare a set of UK taxes to pay for these UK expenditures, and allow the devolved administrations to raise taxes to meet their responsibilities. The UK expenditure responsibilities would include UK debt repayments, any equalisation payments that were agreed, and fiscal transfers in response to business cycle fluctuations and asymmetric shocks.

The first step to implementing such a system (which might have a chance of being stable in the long term) is for the UK Government to recognise that it wears (at least) two hats: as the sole level of government responsible for UK functions; and as the government of England (and also the government of Wales & Northern Ireland for those areas in which Scotland has devolution but they don't). It needs to know what hat it is wearing at any one time, and what policy levers are associated with that hat.

In David Phillips' post he notes: "But what if the UK government wanted to spend more money on defence or state pensions, or wanted to increase taxes to reduce borrowing. ... One interpretation of the Smith proposals would be that the UK government could not use an increase in income tax – one of the main taxes it levies – to fund these policies. This would be absurd and the Treasury has informed us that it was not the intention of the Smith Commission to constrain the UK government in this way."

Contrary to David Phillips, I don't think that a recognition that some taxes are for funding devolved services, whilst others fund UK services, is absurd. On the contrary, it seems like a pre-requisite for a functioning system. Note also that such a recognition would not preclude the use of income tax for the funding of UK services: for example in my submission to the Smith Commission [*], I recommended that the UK Government have as one of its revenue streams the top rate of income tax (because such a tax base is likely highly mobile in response to differences in the rate). But there would have to be two income taxes: one levied by the UK government for UK expenditure, and one levied by devolved government (which in England may well be just the UK government wearing its English government hat) for devolved expenditure.

But in any case, the first step towards a workable system is for some self-awareness on the part of HMT.

[*] Shorter, and better written version is Chapter 8 of 'Beyond Smith' ebook