Government intervention & unintended consequences...

 DOMINIC LAWSON

Our leaders do policies, but they can’t do human

From heating to eating, voters just do the opposite of what the state wants

Dominic Lawson

Sunday January 29 2023, 12.01am, The Sunday Times

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Will someone break it to Keir Starmer that the policy at the heart of Labour’s promise of a “fairer, greener future” will achieve neither of those goals? He has declared: “It will be Labour’s national mission over the next decade to fit out every home ... to make sure it is warm and well insulated and costs less to heat.”

The Conservative government has already spent billions paying for people’s loft and cavity wall insulation, but those subsidies have been means-tested; Labour’s plan is to extend the handout to all homeowners and tenants. Ed Miliband, the shadow “climate change and net zero secretary”, says that unless the government adopts Labour’s plan, “we will have to import more gas from Putin”.

But what’s this? Reported by just one newspaper and not a single broadcaster, Cambridge University has published the first study of the “long-term effect of home insulation in England and Wales”. The two researchers, Cristina Penasco and Laura Diaz Anadon, studied the energy use of over 55,000 households on a National Energy Efficiency Data Framework panel, which had “retrofitted cavity wall insulation or loft installation”.

Those who had installed cavity wall insulation reduced their use of gas by 7 per cent in the first year, 2.7 per cent in year two ... but by year four “any energy savings were negligible”. With loft insulation, worse still: the energy savings “disappear after two years”. This was because people’s behaviour would change in certain predictable ways: they would take more showers, wander around the house with fewer (or no) clothes on and, if it got too hot, rather than turn the thermostat down, open the windows — a sort of de-insulation. Moreover, the insulation they installed would frequently be followed by the addition of a conservatory: a brilliant way to make your home less energy-efficient, if much more enjoyable.

None of this will surprise economists: it is an example of the “rebound effect”, so named by William Jevons in 1865, when, as the Cambridge researchers remind us, “he observed that more efficient steam engines increased rather than reduced coal use, as engines were put into more widespread use”.

I suspect this will come as a startling shock to the politicians, who can be surprisingly ignorant — or perhaps wilfully overconfident — about the way humans respond to policies designed to change behaviour. The most spectacular example is the introduction of a minimum unit price (MUP) for alcohol by the Scottish government in 2018. Nothing like it had been attempted previously: the first minister, Nicola Sturgeon, boasted that “the eyes of the world will be on Scotland” and that it would “save lives”. To be fair to her, this was encouraged by such august figures as Sir Ian Gilmore, the chairman of the Alcohol Health Alliance, who described the 50p-a-unit minimum price as “evidence-based policy exquisitely targeted at those, and those around them, who are currently suffering harm”: he presumably meant the alcohol-dependent, especially those in straitened circumstances.

How did that work out? Last summer Public Health Scotland published an admirably dispassionate report on what the policy had achieved over five years. It concluded that it had had no effect whatever on the alcohol consumption of heavy drinkers; it just further impoverished them and their families. “People drinking at harmful levels who struggled to afford the higher prices arising from MUP coped by using, and often intensifying, strategies they were familiar with from previous periods when alcohol was unaffordable for them. These strategies included obtaining extra money ... via methods including reduced spending on food and utility bills, increased borrowing from family, friends or pawnbrokers.”

In other words, the policy caused more, not less, misery to the very families it claimed to help. Characteristically, Sturgeon has not conceded that it was at all mistaken. But at least, if her claim was right that the world would look at what she had achieved with her vaunted policy, the rest of the planet’s governments will now be saying: thank you, Scotland, for showing us exactly how not to deal with alcoholism among the poor.

Those grateful will include the Westminster government. But what of its own attempt to improve public health via pricing, with the so-called sugar tax? Last week the Medical Research Council published data purporting to show it had, to a degree, achieved its objective, provoking a slew of newspaper headlines such as “UK sugar tax ‘prevents 5,000 cases of obesity in year 6 girls annually’”.

In fact there was no decline in the levels of obesity in that particular year group. What the researchers did was set up a “counterfactual”: they posited that obesity would have continued to rise as it had in recent years, and noted that in the period since the announcement — not the implementation — of the sugar tax in 2013, the level of obesity in 11-year-old girls had remained the same (while increasing in girls of other age groups and in boys of every age).

It seems perverse to attribute the absence of further growth in obesity in a distinct year group and sex to the sugar tax: why would boys, and girls of other ages, not be affected in the same way? Could something else be behind the lack of increase in obesity of year 6 girls?

This point was made by Christopher Snowdon of the Institute of Economic Affairs on BBC Newsnight on Thursday; he has been a trenchant critic of both the Scottish MUP (presciently) and of the UK sugar tax. In respect of the sweet stuff he has observed that the effect of food companies “reformulating” products to meet Public Health England’s target of reducing sugar in processed foods was to drive people away from the now less sweet versions of yoghurts and cereals and towards other ways of getting their sugar fix. So, in the three years from 2015 to 2018, while sales of breakfast cereals plummeted, the now defunct PHE admitted that overall British consumption of sugar in foods increased from 723,000 tonnes to 742,000 tonnes. That does not constitute a policy triumph.

A reasonable question at this point is: why not stop merely criticising well-meaning policies and come up with better ones? All right. If what you want is to reduce reliance on gas: don’t subsidise the consumer for using it. If you want to reduce alcoholism, recognise that addiction is not affected by price increases and that the appropriate response is more expenditure on rehab and other treatment for this psychological disorder within the NHS.

As for obesity ... rationing aside, I have no idea, since it is an unavoidable consequence of something our ancestors could only dream of: superabundance.

dominic.lawson@sunday-times.co.uk

A look at UK's growth sectors:

 

The UK aerospace, defence and space sector is the second-biggest in the free world. Virgin Orbit aims to send satellites into space from British soil but its first launch ended in failure

VIRGIN ORBIT

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In a speech to investors and multinational companies at Bloomberg’s European headquarters in the City, designed to bring greater optimism on the economy, Jeremy Hunt called on businesses to invest in the UK and promised long-term thinking to “turn the UK into the world’s next Silicon Valley”.

The chancellor vowed that growth would be driven by encouraging enterprise, tackling poor productivity and through a focus on key growth sectors including green industries, life sciences, advanced manufacturing, digital technology and financial services, areas where Britain has a competitive advantage.

“When it comes to the innovation industries that will shape and define this century the UK is powerfully positioned to play a leading role,” Hunt said.

Green industries Britain has prided itself on being, as the chancellor put it, a “world leader” in green energy (Emily Gosden writes). It was the first major economy to commit to cutting its emissions to net zero by 2050 and has rapidly deployed some clean technologies, especially offshore wind, of which it had more installed capacity than any other country until being overtaken by China in 2021. However, it has struggled to capitalise in manufacturing with most turbine parts, for instance, made overseas.

Now, as Britain seeks to deliver on highly ambitious goals for a massive scale-up of clean energy deployment this decade, the industry has warned that it must up its game to undo the damage done to electricity generators by the windfall tax and to compete against the huge incentives on offer in America from the Inflation Reduction Act.

Ana Musat, executive director of policy at Renewable UK, said the chancellor should “use the spring budget to announce a reform to our capital allowances regime to avoid Britain losing out in the global race for investment”, with America offering $216 billion in tax credits to those investing in clean energy and transport.

One key request across the energy industry is for reform of the planning system to enable quicker deployment.

Tom Greatrex, chief executive of the Nuclear Industry Association, said the government must establish the promised Great British Nuclear delivery vehicle, which has been delayed amid wrangling over its budget.

Life sciences Successive governments have identified life sciences as one of Britain’s key growth sectors, talking up the idea of creating a “science and technology superpower” (Alex Ralph writes).

The sector, spanning about 282,000 people and £94.2 billion in revenue in 2021, is built on the country’s leading universities, institutions, research base and so-called Golden Triangle of Oxford, Cambridge and London, home to GSK and AstraZeneca, Britain’s two big pharma groups and growing biotech and medtech companies.

Cell and gene therapies, vaccine technology and artificial intelligence, to help drive productivity and the speed of drug discovery, are areas where industry has been investing and focusing.

Jeremy Hunt said the UK had the largest life sciences sector in Europe

TIMES PHOTOGRAPHER JACK HILL

Hunt identified Britain as having the largest sector in Europe, behind only the US and China, for “high-quality” life science papers published; and the world’s top 25 biopharmaceutical companies have operations in the UK. Those bosses agree there are significant opportunities and investment potential for the sector, with research showing an additional £68 billion in gross domestic product can be generated over the next 30 years from increased R&D investment alone.

However, bosses are warning ministers of “real concerns” that the UK’s competitiveness in life sciences is slipping behind global competitors, led by the US. They point to a significant decline in commercial clinical trial activity and a fall in the UK’s share of global R&D investment. Leaders have pinpointed a soaring NHS sales levy on branded medicines as hitting growth in the sector.

Advanced manufacturing The UK aerospace, defence and space sector is the second largest in the free world after the US — data on China’s spend is not readily available — with clusters centred on Lancashire where BAE Systems’ main plants are, the Derby home of Rolls-Royce in the Midlands, and Bristol where Airbus bases it wing technology development (Robert Lea writes).

Airbus employs 14,000 people in Britain

MATTHEW LLOYD/GETTY

The sector employs 400,000 in its supply chain and has been boosted by a multibillion-pound, multi-decade commitment to a next generation Tempest stealth fighter and by the emergence of the small electric aircraft of the future being developed by the likes of Vertical Aerospace.

Rolls-Royce is one of the world’s four big jet engine manufacturers but it has been hit by the operational and production failures of its Trent 1000 engine for the Boeing 787 Dreamliner.

Britain’s automotive industry, which employs 180,000, is in steep decline with the 775,000 cars produced last year putting it way behind Germany, Spain and France. It has fallen well behind the Czech Republic and Slovakia, where Jaguar Land Rover produces the Land Rover Defender.

The sector is going through massive change in the move toward electrification. While Jaguar Land Rover and Aston Martin have been heavily lossmaking, the UK-produced, German-owned luxury marques Rolls-Royce Motor Cars and Bentley have been making record volumes and profits. Volumes at Nissan’s Sunderland plant, once the world’s most efficient, have more than halved in the past six years.

The sector has also been hit hard by the decision of Honda to close its plant in Swindon; by Mini’s decision to shift production of electric cars to China; by the decision of Arrival, the electric van and bus start-up, to quit Britain for better subsidies in America; and most notably recently by the collapse of Britishvolt’s would-be gigafactory.

Digital technology The UK excels in areas such as artificial intelligence, gaming and fintech and exciting developments are spinning out of academia, where Britain is home to ten of the world’s top 100 universities (Katie Prescott writes).

Hunt said Britain has become only the third economy in the world with a trillion-dollar digital technology sector.

“We have created more unicorns [private, start-up companies valued at more than $1 billion] than France and Germany combined with eight UK cities now home to two or more unicorns. The London/Oxford/Cambridge triangle has the largest number of tech businesses in the world outside San Francisco and New York.”

Yet the sector has been buffeted in the past year as the pandemic-induced boom has waned. The industry is deeply frustrated by delays from the government at producing strategies on key areas, in particular semiconductors and artificial intelligence, and recent cuts to research and development tax breaks.

The CBI called for more government subsidies in green technology to combat US incentives, while technology executives want “normal” relations with the EU to foster collaboration.

Financial services Underpinning the chancellor’s plan for the economy is Britain’s vast financial services sector (Ben Martin writes).

“The capability of the City of London combined with the research strengths of our universities makes our aspiration to be a technology superpower not just ambitious but achievable,” Hunt said.

The chancellor name-checked two initiatives that the government hopes will boost financial services. The first was a post-Brexit overhaul of EU insurance capital rules, known as Solvency II, that is aimed at unlocking billions of pounds of capital to invest in the UK. The plans “will begin to be implemented in the coming months”, Hunt said.

The second was the so-called Edinburgh Reforms, a collection of about 30 measures unveiled by the chancellor last month that it is hoped will improve the City’s international competitiveness, an area of particular concern for both ministers and finance executives.

There are worries that London is falling behind other financial centres such as New York, Hong Kong and Amsterdam, particularly for innovative technology companies to list their shares. Yet despite the challenge London is facing, the Edinburgh Reforms took a scattershot approach to turbocharging the City, with measures to tinker with or review a variety of different rules but little in the way of broader strategy.

What many in finance really want is for ministers to move faster. There has been much talk since 2016 about how Britain can seize on Brexit freedoms but it has taken years to push ahead with Solvency II reform, which was identified as an early Brexit dividend.

Levelling up - goes with the video

 

How to invigorate Britain’s second-tier cities

One superstar city does not a successful economy make

Dec 8th 2022

Manchester has plenty of swagger. It has the best team in club football, and is also home to Manchester United. Cranes dot the city centre. Its mayor, Andy Burnham, is the most recognised in the country, beating his counterparts in London and the West Midlands. Yet the cockiness disguises a big problem, for the city and for Britain. The Manchester urban area contains 3.4m people, making it about as populous as Amsterdam, Hamburg and San Diego. But its gdp per head at purchasing-power parity is at least a quarter lower than all three, and stuck at about 90% of the average in Britain itself.

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As with Manchester, so with Tyneside, Birmingham and other conurbations in the Midlands and north of England. Second-tier cities in most countries have productivity that matches or exceeds the national average; a pre-pandemic analysis by the oecd of 11 British second-tier cities, mostly in the north of England, found that gross value-added per worker was 86% of the British average. London is as rich as Paris, but metropolitan Birmingham or Leeds is nowhere near as rich as Lyon or Toulouse.

No one should be happy about this lopsided picture, whether proud northerner or smug southerner. The country’s long-running growth problem cannot be solved—more to the point, has not been solved—by one superstar metropolis.

These huge imbalances in Britain’s economic geography have not gone unnoticed. In the 2010s George Osborne, then chancellor of the exchequer, promoted the idea of a northern powerhouse. Boris Johnson put promises to tackle regional inequality at the heart of his 2019 election campaign. Gordon Brown, a former Labour prime minister, highlighted the problem in a set of proposals for constitutional reform this week (even if proposals to remake Parliament hogged all the attention). But diagnosis is plainly not the same as cure.

It is true that Britain’s second-tier cities face some deep-rooted challenges. Manchester and other post-industrial spots share several ailments—poor health, labour-force scarring, too few people and jobs in their centres. But they could achieve so much more if politicians got a few relatively simple things right.

One is to focus on big conurbations, not towns. Some politicians persist in thinking that smaller places need lots of attention. Mr Johnson’s “levelling-up” agenda included a multi-billion-pound Towns Fund; Treasury workers are being moved to Darlington, a place with 108,000 people in north-eastern England that happens to be next to the constituency of Rishi Sunak, the prime minister. Invigorating metropolises has a far bigger impact; Greater Manchester is home to almost one in five people living in the north of England. And successful conurbations pull surrounding towns up. Britain needs several engines to fire, but they have to be big.

A second priority is to rebalance public investment away from London. Between 2000 and 2019, the government devoted £10,000 ($12,160) per Londoner to economic development, science and technology, and transport. The equivalent figure for residents in the north-east and north-west hovered at around £5,000. There is a rationale for this: productive places generate higher returns on investment. But it is a recipe for entrenching the skew between the capital and the rest. And the Treasury has approved southern schemes, such as upgrading London’s Thameslink railway, with low benefit-cost ratios.

The third and most important priority is to devolve fiscal control. Cities must go cap in hand to Whitehall for much of their money. Only 6% of tax revenue in Britain is collected by local government, a large chunk of it for social care. That is a tiny share in comparison with others. Combine local and regional taxes, and France is on 14%, Germany 32% and America 36%.

Worse, much of the money available to cities is in the form of pots for which they are invited to bid. These pots are numerous and often piddling. Civil servants sit in Whitehall, weighing applications for cash to run adult-numeracy programmes and to build public toilets hundreds of miles away. Officials in Greater Manchester are currently handling more than 110 grants from 15 government departments. The result is colossal inefficiency, especially when policies change—as they do, a lot. Officials wasted many hours this year preparing bids for investment zones, a wheeze of Liz Truss’s brief administration.

This system also distorts decision-making. Cities define their needs in order to fit available grants. When there is money for sprucing up high streets, cities decide they must do that; when there is money for buses, everyone develops a bus obsession. Ministers in London may be tempted to dole out largesse for political ends. A report in 2020 by the Public Accounts Committee, a parliamentary body, was suspicious of how recipients of levelling-up grants were chosen; one town that got money was 535th out of 541 in the priority list.

Mr Brown has some good ideas for tackling these problems, such as consolidating funding streams from Whitehall. But neither Labour nor the Tories have embraced the obvious prescription: give metropolises the power to raise much more money locally and spend it on what they need. Ideally this revenue would be in the form of property taxes, which are too low and are based on out-of-date valuations. Cities will develop an appetite for building if more of the proceeds come their way.

Britain’s northern lites

They need more freedom, too. Greater Manchester has been allowed to plan for housing and office development at metropolitan scale, and is making a good go of it. Other metropolises are still denied that power. Mr Burnham is also being allowed to unpick one of Margaret Thatcher’s less wise reforms, in which buses outside London were privatised and deregulated. But it was a hell of a fight, and required a court case.

Freer cities will inevitably make mistakes. More local revenue-raising risks widening the gap between the poorest and richest places; a mechanism for redistributing money that does not squelch all incentives to develop will be needed. But Britain’s economy cannot keep relying so heavily on London. And its second-tier cities cannot thrive unless they have more control of their destinies. Time to free the north.

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Our brave new world, according to Davos

Read this exclusive extract from our Economic Intelligence newsletter and sign up at the bottom of the article to get it every Tuesday

AMBROSE EVANS-PRITCHARD24 January 2023 • 4:39pm

Data technology is accelerating from a polka to a lightning-fast tarantella. Algorithms will start to “help” and then displace doctors over the next decade because they are statistically better at diagnosis. Nurses will last longer, indispensable for care and the human touch. This will slash health care costs.

Routine journalism will be usurped by ChatGPT and its ilk, the talk of the WEF 2023 in Davos. It can already write passable news articles at a fraction of a reporter’s salary. Before long, it will compete with commentators, and I will retire to our goat farm in France. (Chèvres Poitevines, if you were wondering).

Whether they realise it yet or not, TV news anchors are replaceable too. I learned that it is already possible to create what looks like human beings talking on screen. By 2025 you will not be able to tell whether these invented personalities are fakes or the real thing.  

Artificial intelligence (AI) is taking over our lives even faster than I realised. Breakthroughs have happened over the last five years that are suddenly unleashing volcanic social change.

“We have the emergence of a completely new set of technology, which I think is going to be revolutionary. AI is just at the beginning of the S-curve,” said Microsoft’s Satya Nadella.

“The internet maybe took 30 years to spread around the world, maybe the cloud and mobile took 15 years, and now I think we're talking months,” he said.

He predicts that the latest tech will be a powerful “deflationary force”. If you think that the internet, the cloud, and digital commerce, were behind the great disinflation from 1990 to 2020, be prepared for the next tidal wave.

Satya Nadella believes the AI revolution will prove deflationary CREDIT: Jason Alden/Bloomberg

The nature of Davos is that you are pulled out of your mental silo. You sit next to people at dinners who operate at the frontier, know their stuff, and leave you ashamed of your own ignorance. As a child of the mid-20th century, this happened to me a lot last week.

I learned that the data world changed in 2017 when a team from Google presented a paper called Attention is All you Need at the Conference on Neural Information Processing Systems, cited 63,000 times since then. It is the foundation of GPT-3 (Generative Pre-trained Transformer 3), a language processing technology.

Out of this was born Open AI’s chatGTP, closely linked to Microsoft, and Google’s coming LaMDA alternative. Will these displace the Google search engine with a tailored package that answers your questions? This is where the battle will be fought, or so Davosians tell me.

At a breakfast with Intel’s Pat Gelsinger, I learned that the first AI semiconductor chip was created 35 years ago. It was unusable. “What happened? Nothing happened,” he said.

Thirty years later, generative AI has suddenly allowed tech companies to harness the colossal force of this technology. “Algorithms and data allow us to write software in the cloud in minutes,” he said.

“Our devices can hear everything, see everything, and sense everything. Soon my glasses will be telling my hearing aid who you are. Our weaknesses will be turned into strengths,” he said.

Needless to say, this can be used by the totalitarians against us. “I think, ‘Wow, We can do that?’ And then I think, ‘Oh god, they can do that,” said FBI Director Christopher Wray.

Mr Wray said China’s drive for global dominance of AI is “built on top of massive troves of intellectual property and sensitive data that they’ve stolen over the years”, and that is not subject to democratic constraints.

“That’s something we’re deeply concerned about, and I think everyone here should be deeply concerned about,” he said in Davos.

Technology billionaire Thomas Siebel, now pioneering artificial intelligence at C3.ai, told a tech panel that elastic cloud computing is allowing us to do extraordinary things, with dystopian consequences if we are not careful.

“The largest commercial application will be precision medicine. We have the capability today to aggregate the genome sequences and medical care records of the population into a unified image – haematology, radiology, pharmacology, health history, the works,” he said.

“Much of the population will be wearing – or have embedded – devices that report on pulse, blood chemistry, gut chemistry, or brain waves. It is within our grasp today. We can predict with very high levels of precision who is going to be diagnosed with what disease. We will know who is going to die from a terminal illness in the next three years,” he said.

“This is huge. We’ll deliver lower cost, more efficacious health care, into a healthier community. What could possibly go wrong?”

“Let’s think about this: whether we have a single-care provider (NHS), or a quasi free market system like in the US, if you don’t think they’re going to use these data to ration health care, get over it, because they are. They will in the UK, they will in China, and they will in the US,” he said.

AI is being positioned as a way to solve health crises, but could introduce new ones CREDIT: Kirsty O'Connor/PA

On the global economy, I learned that the Davos fraternity overwhelmingly believes in a soft-landing and a painless immaculate disinflation. “The complacency this year is stunning,” said Harvard professor Ken Rogoff, an expert on debt cycles and a former US chess grandmaster, accustomed to looking more that one move ahead.

The optimism has not reached the surreal levels of January 2008, which must go down in history as the acme of financial self-delusion, but it is strangely blind to obvious dangers.

There is always a narrative that you can latch on to. At this WEF it was the return of China. Vice-premier Liu He, economic plenipotentiary of the Communist Party, came to reassure the business elites that the neo-Maoist purge is finally over and wolf warrior diplomacy is giving way to diplomatic detente.

“We must let the market play the fundamental role in the allocation of resources. Some people say China will go for the planned economy. That’s by no means possible,” he said.

“All-round opening-up is the basis of state policy. China’s national reality dictates that opening up to the world is a must. We must open up wider and make it work better,” he said.

It was a serenade. There was not a single word of criticism of the West, or the US.

While one can take a hard-bitten view of this charm offensive, China’s dash for growth after a three-year drought is real. This will lift many global boats. The Chinese have accumulated $2 trillion of excess savings under the Great Lockdown and want to travel. Brace for an extra million barrels a day of Chinese jet fuel demand in a tight world oil market.  

The question is whether an increasingly “Japanised” China is still capable of roaring growth, and whether this is enough to offset the monetary squeeze and fiscal austerity in the West.

A resurgence of Chinese travel could offset Western austerity CREDIT: Wu Hao/Shutterstock

The major central banks are carrying out the most aggressive interest rate rises in living memory, as well as switching from bond purchases (QE) to bond sales (QT). They are navigating uncharted waters, increasing the cost of money and reducing the quantity of money at the same time.  

This is colliding with near record debt ratios left from the pandemic. The effects of such tightening feed through with a long lag. We have not felt the full sting.

Almost nobody pays attention to the money supply any longer. This is remarkable given that the money aggregates gave a clear forewarning of last year’s surge in OECD inflation. Those few investors who did pay attention dodged the “60/40 massacre” of 2022, the worst combined equity and bond crash in 150 years.

Groupthink is now ignoring the equally clear forewarning of a disinflationary crunch. You would not have known in Davos that the real money aggregates are contracting with varying degrees of intensity in the US, the UK, and the eurozone. The Davosians are betting that the central banks will get the calibration right and step back with perfect timing.

Hhmm. The European Central Bank’s Christine Lagarde was there breathing fire. “Inflation is way too high,” she said, rebuking futures markets for not pricing in enough overkill.

Former US Treasury Secretary Larry Summers repeated his calls for a scorched-earth monetary policy. “The greatest tragedy would be if central banks were to lurch away prematurely and we were to have to fight this battle twice,” he said.

If there were voices at the WEF making the counter-case that central banks have already done enough tightening, and that they ought to stop immediately before inflicting grave damage, I did not hear them.  

Perhaps they are right. But one thing I have learned from going to Davos for almost two decades, is to mistrust snapshot consensus.