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If you’re panicking about a spike in oil prices, look to history for a silver lining

If you’re panicking about a spike in oil prices, look to history for a silver lining

The tanker attacks in the Gulf of Oman have raised fears of a sharp increase in the price of oil.

These are currently being offset by worries about a slowdown in the world economy and a drop in the demand for oil.

But what if the conflict escalated and oil prices really did go through the roof?

We’ve actually been here before, in 1973/74. Then, Opec flexed its muscles and the oil price rose four-fold. Today, that would mean the price rising to well over $200 a barrel.

The oil shock in the 1970s came at a time when the institutional structures created by America in the aftermath of the Second World War were already crumbling.

The Bretton Woods agreement of 1944 imposed fixed exchange rates on the western world. Devaluations were few and far between, and countries were expected to focus their monetary policies on stabilising the exchange rate.

This effectively ended in 1971, when President Richard Nixon terminated the convertibility of the US dollar to gold at a fixed price of $35 an ounce.

There are parallels in the world of today. The long-standing trend towards freer trade, for example, has been brought into question.

One of the characters in the popular American comic strip Doonesbury once described the 1970s as a “kidney stone of a decade”. The experience of the UK certainly merited that description. Inflation soared to more than 20 per cent. Unemployment trebled, to the then incredible level of over a million. Strikes plagued the economy. The nationalised industries were worse than useless. It could easily take six months for the state-controlled telephone company to install a landline.

This is the decade in which Jeremy Corbyn’s ideas were formed. He bathes in its rosy glow with fond nostalgia.

There is little chance of inflation surging in a similar way today.

In the early 1970s, the inflationary pressure already existed. The inflation rate in 1973, prior to the oil price increase, was eight per cent in the UK and seven per cent even in Germany. Ted Heath had approved a scheme – which seemed lunatic even at the time – that wages would rise, not every year, but every month in line with prices. Rapidly rising inflation was built into the system.

The oil price rise transferred, in the short term, income from the west to the oil producers.  So a shallow recession would be more or less guaranteed. However, the oil producers eventually have to spend their increased income, and opportunities are created.

Looking back, there was a silver lining. It is not a coincidence that this was the decade in which future Nobel Laureate Bill Nordhaus began his lifelong mission to integrate energy and climate into economic models.

The massive increase in the oil price induced firms to start to move away from reliance on oil. It gave market incentives to invent, fund, and develop new low-carbon products and processes.

A big hike in the oil price today would cause problems. But at least the script is familiar, and it would accelerate carbon reduction.

As published in City AM Wednesday 19th June 2019
Image: Tanker via Pixabay
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From taxes to cats, May’s government has been an affront to Tory ideology

From taxes to cats, May’s government has been an affront to Tory ideology

Theresa May has finally announced her resignation. How can we capture the flavour of her tenure in office?

This can be found in the dry and measured content of the Economic and Fiscal Outlook from the Office for Budget Responsibility (OBR).

The OBR stated in its latest publication in March 2019 that: “the tax receipts-to-GDP ratio ends the forecast in 2023-24 slightly higher than its 2018-19 level”.

Of course, this is a forecast, and all the usual caveats need to be attached. But, remarkably, it was the intention of a Conservative government for taxation to be higher in five years’ time than it is now.

Already, taxes are high. Taxes as a percentage of GDP in 2018/19 were higher than at any time since 1979, the first year with Margaret Thatcher as Prime Minister.

Gordon Brown effectively ran economic policy from 1997 until 2010. Even at the time, he was satirically referred to as the Great Helmsman, a name bestowed upon leaders of centrally-planned economies such as Joseph Stalin.

Brown could not resist detailed meddling of the most microscopic variety, exactly as if he were in charge of a Five Year Plan in the old Soviet Union. But during his long reign, taxes as a percentage of GDP remained lower than they are now.

And it’s not just taxes but regulation too where the government under May is behaving in a decidedly un-Conservative manner.

Despite what the Tories like to say, the culture of interference seems to have got even worse under May.

A rather minor issue symbolises the mentality of the May regime. This is the Cats’ Bill, a private member’s bill sponsored by Rehman Chishti, Tory MP for Gillingham and Rainham. Michael Gove has described the bill as an “inspiration”.

There is undoubtedly a problem with cats being hit by motor vehicles. Campaigners estimate that 250,000 are either killed or injured every year in this way. These incidents create a great deal of stress and unhappiness for the owners. It would obviously be good if the number could be reduced.

The bill would force owners to microchip their cats so that they could be identified. This seems reasonable. But Chishti proposes that a motorist hitting a cat should be required not just to stop, but to report the incident to a vet, on pain of a fine of up to £20,000.

The bill is brought in with the very best of intentions. But it will simply create another regulated industry.

Vets will demand that the motorist pay a fee for their effort in making a record of the accident – even better, that they get a special subsidy from the taxpayer.

Civil servants will be recruited to check that the vets’ forms are correctly filled in. There will be demands for new regulations on vets to ensure that they are trained to comply with the new law, and a way to enforce these rules for drivers.

None of this seems to have occurred to Chishti. For him, a problem exists, and the way you solve it is by state intervention.

Another way, of course, is for owners to take more personal responsibility for their cats, but that doesn’t seem to occur to politicians.

From cats to taxes, May essentially created a social democratic government, not a Conservative one.

As published in City AM Wednesday 29th May 2019

Image: British Cat by Colicaranica via Wikimedia is licensed under CC BY-SA 3.0
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Puzzled over Australia’s shock election result? Economics can help explain

Puzzled over Australia’s shock election result? Economics can help explain

The surprise of the week was the re-election of the centre-right Coalition government in the Australian General Election.

The Labor opposition had led every major opinion poll for the past two years. But Scott Morrison of the Coalition is still Prime Minister – and it is his Labor opponent who is resigning as leader.

Economists, regardless of their own political views, can take pleasure in this result. It is yet another illustration of the importance of what economics calls revealed preference over stated preference.

The concept of stated preference is the bedrock of the entire polling industry. People are asked to give their views on hypothetical questions. Who will you vote for? Do you prefer Pepsi or Coke?

George Gallup introduced opinion polls in America in the 1930s. His flash of genius was to combine questionnaires with what at the time was the infant science of statistical theory. He used the latter, for example, to work out that a broadly accurate picture of opinion in the whole of the US could be obtained from a sample survey of only a few thousand people.

Since then, polling techniques have become much more sophisticated. Their fundamental problem is not the statistical science, but the fact that their results depend upon stated preference. In contrast, with revealed preference people quite literally reveal their preference by making an actual choice. They vote for the Coalition and not Labor. They buy Pepsi and not Coke.

On social media, people – perhaps unwittingly – reveal a great deal about themselves, their opinions, and their emotions. Analysis based on this data will surely supplant the existing approaches of the polling industry.

This is of course by no means the only close result which opinion polls have failed to call. In our own 2017 election, for example, most polls indicated that Theresa May was heading for a comfortable majority.

But the Australian election is also particularly interesting because of the issues over which it was fought, reflected in the results.

There were big swings against Labor in Queensland, for example. A key issue here is coal mining – in particular, a major new mine proposed by the Adani company.

A secret opinion survey was leaked on 14 May. It claimed to find that in Queensland itself the coal mining industry was “nearing crisis” and had “strong negative perceptions”.

Yet on 18 May, the Queensland electorate swung decisively against Labor, which had made climate change and emissions control a major part of its platform.

Similarly, Labor campaigned on the policy of abolishing franking credits. These may seem esoteric, but the effect was widely understood: pensions would become taxed more heavily. As a result, over-65s voted overwhelmingly against Labor.

No matter how right-on they may seem and how much support they get in polls, many environmentalist policies are not popular in practice. The gilet jaunes movement in France is further testimony to this.

And people reveal a consistent preference for paying less rather than more tax.

Whoever becomes Conservative leader might find it useful to learn from the Australian result.

As published in City AM Wednesday 22nd May 2019
Image: Australian Voting Booths by Australian Electoral Commission via Wikimedia is licensed under CC BY 3.0 AU
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You can’t take the economics out of football

You can’t take the economics out of football
The appearance of Liverpool and Spurs in the Champions League final and Arsenal and Chelsea in the Europa Cup one has generated massive interest. But the official ticket prices for the games are surprisingly reasonable.
Liverpool and Spurs have been offered 16,613 tickets each. Five per cent of these are expensive, at £513 each. A further 21 per cent are available at £385. But the bulk – 54 per cent – cost only £154, and there are even 20 per cent which can be bought for just £60.
These compare favourably with other major cultural events, such as a performance at Covent Garden with top opera stars.
Uefa organises the competitions and sets the prices of the tickets. The demand is of course very much greater than the supply. This will be reflected in the prices charged on the unofficial market in tickets.
Why does Uefa not bag this revenue for itself? Even if it doubled the official prices, the events would still sell out.
The NFL in America follows a similar policy for the Superbowl.
Top behavioural economist and Nobel laureate Richard Thaler quotes a top NFL executive in his book Misbehaving.
The NFL “takes a long-term strategic view” towards ticket pricing at the Super Bowl, keeping them reasonable despite huge demand in order to foster its “ongoing relationship with fans and business associates”. The point is that both Uefa and the NFL have repeated dealings with clubs and fans. They judge that it would be counterproductive in the longer term to exploit their monopoly of major events.
In contrast, the hotels which the English soccer fans are now desperately seeking to book will probably never see the individuals who stay there again. It’s a one-off transaction, and so they are free to raise their prices so as to maximise their immediate profits.
Air fares are also going through the roof, particularly for the exotic location of Baku where Chelsea and Arsenal will play. There are far fewer travel options than there are to Madrid, where the Champions League game will be held.
Although the algorithms used by airlines will set these sky-high prices, some of these companies will be used repeatedly by quite a number of fans. They therefore do run the risk of creating a bad image which damages their business in the longer term.
The fact that the two finals are an all-English affair is raising concerns in other major European soccer nations. The standard of play in Spain’s La Liga or Italy’s Serie A is certainly comparable to that in the Premier League.
But the Premier League dominates in terms of the monies it receives from television rights – more than twice La Liga, for example.
This means more money for clubs, which can then buy more top players. This phenomenon is observed throughout modern popular culture. Success itself breeds success, and unto him that hath, more shall be given.
It is a totally different world to when the maximum wage for players was fixed at £20 a week, and they wore Brylcreem and smoked Woodbines. But economics is always present.
As published in City AM Wednesday 15th May 2019
Image: Bazu Olympic Stadium via Wikimedia is licensed under CC BY-SA  4.0
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It’s not cutting-edge AI we should fear, but mediocre automation

It’s not cutting-edge AI we should fear, but mediocre automation
If there were a betting market in future winners of the Nobel prize in economics, MIT’s Daniel Acemoglu would be at pretty short odds. His highly innovative work has already won him a string of prizes. So his research is always worth following – especially when he challenges the conventional wisdom, as in his paper in the latest issue of the Journal of Economic Perspectives. Economists are usually optimistic about the impact of new technology. The innovation itself destroys jobs – the Luddite riots in the early nineteenth century, for example, were in direct response to the displacement of skilled handloom weavers by the new machinery in textile factories. But this, along with all subsequent waves of innovation, enabled goods and services to be produced more cheaply. As a result, the spending power of everybody else in the economy increased, and new jobs were created. Mass production in factories during the industrial revolution was of course a phenomenon without precedent in the history of the world. Other completely revolutionary technologies followed, such as the railways and electricity.  The rapid advance of robots and artificial intelligence seems to be the latest example of a transformative new technology. Acemoglu argues that it is not these “brilliant” (as he puts it) technologies which threaten jobs and wages. These enable things to be produced much more cheaply than before, substantially boosting real incomes elsewhere in the economy. Then new kinds of goods and services can be created as a result of the increase in spending power. Rather, the risk to overall employment and living standards comes from the introduction of “so-so technologies”, which generate only small productivity improvements. Examples of so-so technologies include automated customer service, which has displaced human service representatives. It is, however, generally deemed to be low-quality, and thus unlikely to have led to large productivity gains. The cost of your bank charges or your supermarket shop have not exactly been reduced much by the introduction of automated answering systems or self-service check-outs. But jobs have been lost as a result. Acemoglu suggests a key reason why modern economies have, as he puts it in the jargon, “moved along this [particular] innovation possibilities frontier”. In the US and also here in the UK, the tax system has evolved in ways which subsidise the use of equipment and penalise the use of labour through payroll taxes such as our employers’ national insurance contributions. Interestingly, he also points the finger at the big tech companies. Their business model is based on automation and small workforces. The impact of innovative technology which destroys particular jobs needs to be counterbalanced by innovation elsewhere, which creates new tasks, new jobs which no one had previously thought of. We have had some, such as software and app development and database design, but nowhere near enough. Governments need to rethink the tax system as it applies to investment and employment. And they need to rebuild support for long-term innovation, which gives more scope to invent completely new jobs.
As published in City AM Wednesday 8th May 2019
Image: Self Checkout by Ben Schumin via Wikimedia is licensed under CC-BY 2.0
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Extinction Rebellion hates capitalism, but they wouldn’t exist without it

Extinction Rebellion hates capitalism, but they wouldn’t exist without it
The Extinction Rebellion protesters on the streets of London seemed to consist of two disparate interest groups: pensioners and the young. Their shared connection is that most of them – certainly in the former group – seemed to be affluent. An identical alliance was observed a few months ago in the rather unlikely setting of the borough of Richmond upon Thames. The Liberal Democrat council wanted to introduce a 20 mile an hour speed limit on every single road in the borough, except for two major trunk roads. But they chose to hold a referendum on the matter before making a decision. Just as with Brexit, this plan rather backfired on them. The proposal was defeated. In an uncanny replay of the EU vote itself, the margin was narrow at 49 to 51 per cent. Echoing the national Lib Dem attitude to the Brexit vote, the local councillors announced that they would ignore the result of a vote that they themselves had instigated. Shamelessly, given the way that they have vilified older voters over Brexit, the Lib Dems cited as a reason for bringing in the speed limits that 60 per cent of elderly respondents were in favour. Their second reason was that a similar percentage of young people also voted for their proposition. At one level, this is just an amusing anecdote revealing the true nature of the supposedly cuddly Lib Dems. Even by the standard of modern politicians, they are wholly duplicitous. Nick Clegg set the tone in the 2010 General Election, when he promised not to put up tuition fees, and then promptly voted to treble them when he became deputy prime minister. Yet the episode in Richmond upon Thames does suggest that this strange political alliance between affluent pensioners and young people is both widespread and deep seated. A sizeable proportion of this new grouping appears to believe that all their problems are caused by capitalism. But if it were not for capitalism, very few of them would exist in a way which allowed them to carry out political protests. In the case of the pensioners, this is quite literally true. Without the prosperity generated by capitalism, most of them would now be dead. After all, life expectancy for men is now 79 years and for women 83, and over the past 100 years, it has increased by nearly three years a decade. So in 1919, life expectancy was in the low to mid-50s. If life expectancy had not increased, then the ranks of Extinction Rebellion would have been noticeably thinner. The Nobel prize-winning economic historian Robert Fogel argues that much of the improvement to life expectancy was due to the increases in calorific intake and better nutrition which economic growth made possible. As for the young, it was only in 1918 that the school leaving age was raised from 12 to 14. Apart from a really tiny minority of the very privileged, they would all have been at work rather than at “uni”. Capitalism generates economic growth by encouraging innovation. And it will be innovation that will solve the climate problem, rather than wearing a hair shirt.
As published in City AM Wednesday 1st May 2019
Image: Oxford Circus Extinction Rebellion by Andrew Davidson via Wikipedia is licensed under CC BY-SA 4.0
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