#12 – Nine toasts to simplicity in 2014

The Year Ahead

In looking back at 2013 and ahead to 2014, I would like to thank everyone for their interest in the new discipline of Surplus Energy Economics, and for the many useful suggestions and questions that have helped me develop the thesis.

In this final article of the Old Year, I would like to welcome 2014 with a single thought, which is this –

“the simple answer is usually the right one”

*  *  *  *  *  *  *

Simple explanations and simple responses could undoubtedly give us, and our leaders, some useful pointers. Here are nine simple thoughts to be going on with (and please forgive me if some are just too simple!):

1.    “Borrowing lands you deeper in debt”.

The coalition government, to its credit, has stuck to this axiom where the public finances are concerned. Goodness only knows what debt and the deficit would look like had Labour been allowed to act on the daft nostrum that we can borrow our way out of a debt crisis.

2.    “Houses do not go out to work”

For an economy to prosper, both we and our capital need to earn an income. We are not doing that if we think that property price escalation is a substitute for enterprise. Our capital isn’t earning anything if it’s tied up in houses rather than in businesses or infrastructure.

3.    “Borrowing isn’t growth”

Time and again in our recent economic history, we have allowed ourselves to believe that using debt to boost economic activity constitutes “growth”. It doesn’t. At the moment, the British economy is picking up, but there has to be a suspicion that increased personal borrowing, plus a £12bn dollop of PPI compensation, has accounted for an uncomfortably large proportion of that growth.

4.    “A healthy economy saves and invests”

Labour, resources, energy, investment and initiative are the pillars of a successful economy, and at least one of these – domestically-created investment – is languishing alarmingly.

There are two ways (and only two ways) in which investment can be funded – you can borrow it, or you can save it. Borrowing, as we’ve seen, simply lands us further in debt, so we need healthy saving if we are to promote the formation of capital. Without capital, the economy cannot grow.

Without savers, we cannot form capital.

Higher interest rates alone can restore a propensity to save – and there is something deeply contradictory about a “growing” economy that is incapable of capital formation – but an immediate step would be to cease taxing interest when that interest is actually a sub-inflation return on capital.

5.    “Don’t feed the golden goose on strychnine”

Historic evidence should leave us in no possible doubt that small and medium-sized enterprises are the most effective creators of jobs, growth and wealth, but our fiscal system has long done its very best to poison new businesses at birth. The name of that poison is Business Rates.

It is the enterprise equivalent of strychnine.

If the Business Rates imposition on a new business is (not untypically) £50,000, and the margin is 20%, the business needs sales of £250,000 just to pay the tax-man, even before anything has been spent on useful stuff like premises, equipment, inventory or wages. In any sane economy, Business Rates would be abolished, and the income from it replaced by some form of progressive tax on profits.

6.    “We all need a home”

(Tip – it would be hard to think of a single bigger vote-winner than this one) 

Obvious though this ought to be, successive governments have ignored the simple fact that a house-building programme could create worthwhile economic activity whilst also beginning to make some inroads into a horrendous housing shortage. At present, housing starts are at less than half the 250,000 level that is required even to contain homelessness at its current level.

Many people are not in a position to buy a property, and need to rent. Others, no doubt, don’t want to buy in an over-priced market, especially as there is only way in which interest rates can go.

There is a simple answer to this one – build council houses.  

7.     “Each to his own”

Old Labour believed in growing the state, but all too often succeeded only in growing the super-fatted bureaucracy. Swinging to the other extreme, the Blairites believed, that privatisation, and the creation of quasi-markets, would improve the public services.

Events show that neither approach works, for a very simple reason – some services are best provided by the state, and others by the private sector.

Do you fancy a nationalised plumbing industry? Would you like to see policing privatised? Obviously not. Each to his own.

8.    “Competition is the natural order of things….”

(…..or should be, anyway, in a free-market economy).

Adam Smith – the doyen of right-leaning economists – had no time for what, today, is called corporatism. “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices”, wrote Smith in The Wealth of Nations.

In 1911, “trust-busters” in the US finally broke up Standard Oil using legislation passed in 1890 (and beefed up in 1914). They also broke up telecoms giant AT&T (a.k.a. “Ma Bell”) in 1982. We need to do the same now, with a particular focus on utilities, supermarkets, mobile phone operators and the retail end of energy supply.

9.    “Poor workers are poor consumers”

Legend has it that, when the first production-line robot appeared in a British car plant, a gloating manager demonstrated it to a shop-steward with the words “try to get that to join your union!”

“Try to get it to buy one of your cars”, was the obvious retort. Individual businesses may benefit by driving wages downwards, but the economy as a whole needs affluent employees with money in their pockets.

I warmly endorse yesterday’s observation by CBI Director-General John Cridland that “one of the biggest challenges facing businesses is to deliver growth that will mean better pay and more opportunities for all their employees after a prolonged squeeze”.

*  *  *  *  *  *  *

I hope you like these “simple thoughts” – and perhaps you can suggest some additions?

Here’s to a fabulous – a SIMPLY fabulous – New Year to you all!

 

Tim

 

#11 Assume a tin-opener……

“Assume a tin-opener”

End-of-year thoughts

In a recent speech, former US Treasury Secretary Larry Summers posed an interesting question, which I’ll paraphrase for you.

The electricity industry accounts for 4% of GDP by value. If electricity supplies are halted, how much economic activity remains?

To the economist, the answer is 96%.

To any sane non-economist, however, the answer is 0%, because, without electricity, the entire economy would grind to an immediate halt.

This, essentially, tells you all you need to know about the real role of energy.

It probably also tells you all you need to know about economists.

My late father used to recount a story about three professors, marooned on a desert island with hundreds of tins of baked beans, but no tin-opener. How can they eat?

“My answer”, says the chemist, “is to put the tins in water. Over time, they will corrode away”.

“But”, says the physicist, “how many years is that supposed to take? My solution is to put the tins in a fire. Pressure will increase, and they will soon explode”.

“Covering the entire island with beans and peppering us with lethal shrapnel”, retorts the chemist.

Both turn to the economist for advice. It is succinct:

“Assume a tin-opener”.

A useless answer, of course. But is “assume perpetual growth” any better?

*  *  *  *  *  *  *

Unless some event provokes me into print (which is by no means impossible), this is likely to be my last article of 2013. It’s been an eventful year. In August, I left Tullett Prebon, where I’d been head of research since 2009. During the summer I completed the manuscript of my book, Life After Growth, which was published in November.

If you’ll indulge me for a few moments, I’d like to discuss my recent activities, as this leads into future plans. Let me make one thing abundantly clear, though – everything that has happened in recent months reaffirms my belief in the “surplus energy” interpretation (and it also, for that matter, reaffirms my belief that, broadly speaking, economic growth is over).

Working with Terry Smith and others at Tullett Prebon was a marvellous experience. After leaving the company, I immediately became immersed in completing the book. Life After Growth was a huge project even though I’d laid much of the groundwork with earlier research. The big challenge was to tie it all together, my aim being to articulate, in everyday language, an analysis that could be applied equally to the past, the present and the future of the economy. What you don’t really see when you read the book is the extensive statistical work that it draws on.

I got this done, but I don’t mind saying that it was exhausting. Ironically, energy (in the purely personal sense of the word) was in short supply after I’d completed the book.

As a result, I didn’t feel able to accept any of the many speaking invitations that I received, even though a lot of these were at very interesting events. As the festive season approaches, I’m recharging my batteries and thinking about what to do in 2014.

*  *  *  *  *  *  *

One big project has dominated my thinking about future directions. You could think of it as Life After Growth II – The Database. The aim is to model EROEI, and its implications in terms of energy costs and economic trends, in a comprehensive way. It’s a huge exercise, and apologies are due to anyone who has noted the dearth of written comment from me in recent months.

At time of writing, the database is nearly complete. I’ve modelled the EROEI environment by energy source and location – back-testing it for three decades, which is about as far back as is possible with the data sources that I have – and have moved on to countries and regions, starting with the US, Canada, Mexico, Germany, Britain, France, Brazil, Australia, China, India, Japan, Russia, Saudi Arabia and South Africa.

I can tell you now that most (though not all) of these countries are facing economic erosion, and most are carrying financial commitments that their future economic trajectories will not allow them to honour.

The scale of these challenges differs markedly between countries. If you were to read the database, it would cheer you up if you happened to be Norwegian or Saudi Arabian, but would depress you no end if you are British, Mexican or Japanese.   

*  *  *  *  *  *  *

The reality, you see, is that energy isn’t “only” 8% of the global economy any more than electricity is “only” 4% of US activity. Without energy, the economy would cease to exist.

This isn’t the problem, of course, because energy supplies are abundant. The real problem is that we’ve exhausted supplies of energy which are either “highly concentrated” (if you’re a scientist), “high return” (if you’re an energy economist) or, in layman’s terms, “cheap”.

As a result, much of the world is ex-growth (as, arguably, it has been for at least a decade). Human ingenuity is such that we should be able to cope with an ex-growth economy, not least by curbing wastefulness.

This would be true if we hadn’t already applied that same ingenuity in the creation of a financial system predicated on “assume a tin-opener perpetual growth”.

This means that politicians and central bankers are trying to defy economic gravity, resorting to all sorts of increasingly desperate fiddles policies in order to keep at least the semblance of growth going. It won’t work, of course.

At least my new database is already telling me where, when and how things are likely to go wrong (or, in some cases, right).

My task for 2014 is to work out how best to use this information.

Meanwhile, have a great Christmas, and please do make sure you’ve got a corkscrew, a bottle opener – and, of course, a tin-opener!

Best wishes,

Tim

#10 Energy – the high cost of low calibre leadership

UK Energy

You couldn’t make it up

You really, truly, couldn’t make it up.

With more than nine million people in severe debt difficulties, the Red Cross sending food parcels to Britain for the first time since 1945, and the choice between eating and heating confronting millions of the poorest households as winter looms and the cost of essentials soars, the Westminster Punch-and-Judy show is now doing its best to imperil the country’s energy security.

First, Ed Miliband promised to force energy suppliers to freeze bills after the next election in 2015. Now, David Cameron may have asked the same companies to freeze them until the election as well.

Of course, Cameron’s initiative doesn’t stop there. If only it had. He now plans to scale back the valuable home insulation programme (putting perhaps 13,000 jobs at risk), and dip into the taxpayer’s pocket as well, in order to take £50 off annual fuel bills.

This, Cameron clearly thinks, will boost his electoral chances. If only percentages were taught at Eton…………. As electoral bribes go, £50 really doesn’t cut it, when set against dual-fuel bills of £1,500 – which are likely to go on rising anyway. 

*  *  *  *  *  *  *

Whilst all this vote-grubbing nonsense is going on, no-one is giving a thought to how to keep the lights on. Just as Nero fiddled whilst Rome burned, our so-called leaders are playing politics whilst Britain heads for the deep-freeze.

Indigenous energy production has slumped by 53% over ten years. Of the production capacity that remains, a further 33% is likely to disappear by 2020, by which time output will meet only 37% of our current consumption.

The bottom line is that we need huge investment in energy if we’re to keep the lights on. It should be obvious – obvious, that is, to anyone whose IQ exceeds his shoe-size – that companies are not going to deliver this investment if pricing is turned into a political shuttlecock.

Are the Chinese, the French – or anyone else, for that matter – really going to be daft enough to invest in building capacity in a country that threatens them with price-freezes? 

Instead of a strategy – one that invests in replacement nuclear capacity, promotes waste-to-heat conversion and expands gas storage – we get waffle, political posturing over energy prices, and far-fetched hyperbole about shale from ministers who seem to be completely clueless about energy issues.

*  *  *  *  *  *  *

First we had Teflon Tony. Then we had Gormless Gordon. Now we have Calamity Clegg and Devious Dave. Where on earth do we get these “leaders” from?

The answer, I’m afraid, lies in the degradation of the political system. Not that long ago we had mass-membership parties, high turnouts in general elections, active local participation in politics, local democracy, and a string of checks to executive power including robust constituency parties, independently-minded MPs, influential cabinet ministers and an impartial Civil Service.

Over two decades or so, all of the mechanisms so painstakingly constructed to give us capable and accountable leadership have been sacrificed on the altar of executive power concentrated in 10 Downing Street.

Local parties have been subjected to control from the centre, and are often deprived even of the right to choose their own Parliamentary candidates. Local authorities have been turned into service providers financed and controlled from the centre. Mass membership parties are a thing of the past, because joining a party has become pointless. Cabinet posts are given to nonentities who are largely excluded from decision-making anyway. Civil Service counsel and restraint has been degraded by the insertion of an army of ‘political advisers’ and spin-doctors between civil servants and their political masters.

The result is that the country is governed by a narrow, self-perpetuating clique of professional politicians, with virtually no real-world experience, who gather around the Downing Street sofa much as the place-seekers and manipulators of an earlier age gathered around the throne.  

The only objective, it seems, is to cling on to power within the Westminster bubble.

Never mind if efforts to create a feel-good effect ahead of the 2015 election create a housing price spike and burden the public with yet more debt.

Never mind if political posturing deters investors from replacing our deteriorating energy infrastructure.

Never mind, even, if the lights go off – just so long as it doesn’t happen before the next election.  

A former Home Secretary once said that his department was “not fit for purpose”.

Neither, frankly, is our debased system of government.