Economics – We Know Zero

The Economics of Laughter and Forgetting

27. March 2025 · Write a comment · Categories: Actuarial, COVID-19, Economics, Prediction, Risk

https://parliament.assetbank-server.com/assetbank-parliament/images/assetbox/b26cd8f5-538e-4409-b033-f1f02aea6821/assetbox.html

Milan Kundera wrote his The Book of Laughter and Forgetting in 1979, a few years after moving to France and the same year he had his Czech citizenship revoked. His books had all been banned in Czechoslovakia in 1968, as most of them poked fun at the regime in one way or the other. The Book of Laughter and Forgetting was no exception, focusing, via seven stories, on what we choose to forget in history, politics and our own lives. One of the themes is a word which is difficult to translate into English: litost.

Litost seems to mean an emotional state of feeling of being on your own suddenly brought face to face with how obvious your own hopelessness is. Or something to that effect. Kundera explored several aspects of litost at length in the novel. However, for all the difficulties of describing it exactly, litost feels like a useful word for our times, our politics and our economics.

I want to focus on two specific examples of forgetting and the sudden incidents of litost which have brought them back into focus.

The first, although not chronologically, would be the pandemic. There are several articles around suddenly about the lessons we have not learnt from the pandemic, to mark the fifth anniversary of the first lockdown. Christina Pagel, backed up by module 1 of the Covid-19 Inquiry, reckons:

Preventing future lockdowns requires planning, preparation, investment in public health infrastructure, and investment in testing, virology and medical research…

She takes issue with some of the commentary as follows:

But the tenor of reporting and public opinion seems to be that “lockdowns were terrible and so we must not have lockdowns again”. This is the wrong lesson. Lockdowns are terrible but so are unchecked deadly pandemics. The question should be “lockdowns were terrible, so how can we prevent the spread of a new pandemic so we never need one again?”.

However the stampede to get back to “normal” has mitigated against investing in infrastructure and led to a massive reduction in testing and reporting, and the Covid-19 Inquiry has given the government cover (all questions can just be responded to by saying that the Covid Inquiry is still looking at what happened) to actively forget it as quickly as possible. Meanwhile the final module of the Covid-19 Inquiry is not due to conclude until early 2026, which one must hope is before the next pandemic hits. For which, as the former Chief Scientific Adviser and other leading experts have said, we are not remotely prepared, and certainly no better prepared than we were in 2020.

It is tempting to think that this is the first major recent instance involving the forgetting of a crisis to the extent that its repetition would be just as devastating the second time. Which is perhaps a sign of how complete our collective amnesia about 2008 has become.

Make no mistake, 2008 was a complete meltdown of the core of our financial system. People I know who were working in banks at the time described how even the most experienced people around them had no idea what to do. Alistair Darling, Chancellor of the Exchequer at the time, claimed we were hours away from a “breakdown in law and order”.

According to the Commons Library briefing note from October 2018, the Office for Budget Responsibility (OBR) estimates that, as at the end of January 2018, the interventions had cost the public £23 billion overall. The net balance is the result of a £27 billion loss on the RBS rescue, offset by some net gains on other schemes. Total support in cash and guarantees added up to almost £1.2 trillion, including the nationalisation of Northern Rock (purchased by Virgin Money, which has since been acquired by the Nationwide Building Society) and the Bradford & Bingley (sold to Santander) and major stakes in RBS (now NatWest) and Lloyds. Peak government ownership in these banks is shown below:

If you read the Bank of England wacky timeline 10 years on from 2018, you will see a lot about how prepared they are to fight the last war again. As a result of this, cover has been given to actively forget 2008 as quickly as possible.

Except now various people are arguing that the risks of the next financial crisis are increasing again. The FT reported in January on the IMF’s warnings (from their Global Financial Stability Report from April 2024) about the rise in private credit bringing systemic risks.

Meanwhile Steve Keen (one of the very few who actually predicted the 2008 crisis) in his latest work Money and Macroeconomics from First Principles, for Elon Musk and Other Engineers has a whole chapter devoted to triggering crises by reducing government debt, which makes the following point:

A serious crisis, triggered by a private debt bubble and crash, has followed every sustained attempt to reduce government debt. This can be seen by comparing data on government and private debt back to 1834.

(By the way, Steve Keen is running a webinar for the Institute and Faculty of Actuaries entitled Why actuaries need a new economics on Friday 4 April which I thoroughly recommend if you are interested)

Which brings us to the Spring Statement, which was about (yes, you’ve guessed it!) reducing government debt (or the new formulation of this “increasing OBR headroom”) and boosting GDP growth. Watching the Chief Secretary to the Treasury, Darren Jones, and Paul Johnson from the IFS nodding along together in the BBC interviews immediately afterwards, you realised how the idea of allowing the OBR to set policy has taken hold. Johnson’s only complaint seemed to be that they appeared to be targeting headroom to the decimal point over other considerations.

I have already written about the insanity of making OBR forecasts the source of your hard spending limits in government. The backdrop to this Statement was already bad enough. As Citizens Advice have said, people’s financial resilience has never been lower.

But aside from the callousness of it all, it does not even make sense economically. The OBR have rewarded the government for sticking to them so closely by halving their GDP growth projections and, in the absence of any new taxes, it seems as if disabled people are being expected to do a lot of the heavy lifting by 2029-30:

Part of this is predicated on throwing 400,000 people off Personal Independence Payments (PIPs) by 2029-30. According to the FT:

About 250,000 people, including 50,000 children, will be pushed into relative poverty by the cuts, according to a government impact assessment.

As Roy Lilley says:

We are left standing. Abandoned, to watch the idiocy of what’s lost… the security, human dignity and wellbeing of our fellow man, woman and their family… everything that matters.

As an exercise in fighting the last war, or, according to Steve Keen, the wars successive governments have been fighting since 1834, it takes some beating. It was litost on steroids for millions of people.

So what does the government think these people are going to fill the income gap with? It will be private debt of course. And for those in poverty, the terms are not good (eg New Horizons has a representative APR of 49% with rates between 9.3% APR and maximum 1,721% APR).

And for those who can currently afford a mortgage (from page 47 of the OBR report):

Average interest rates on the stock of mortgages are expected to rise from around 3.7 per cent in 2024 to a peak of 4.7 per cent in 2028, then stay around that level until the end of the forecast. The high proportion of fixed-rate mortgages (around 85 per cent) means increases in Bank Rate feed through slowly to the stock of mortgages. The Bank of England estimates around one-third of those on fixed rate mortgages have not refixed since rates started to rise in mid-2021, so the full impact of higher interest rates has not yet been passed on.

So, even before considering the future tax increases the FT appears to be expecting, the levels of private debt look like they will shoot up very quickly. And we all know (excluding the government it seems) where that leads…

The Government Knows Zero

13. March 2025 · Write a comment · Categories: COVID-19, Demographics, Economics

*Successive OBR forecasts of % changes in GDP year on year since the pandemic https://obr.uk/publications/*

This blog has a long history with the OBR, which I won’t go into here, although you can get a sense of it from this. It was the reason the blog is called We Know Zero. However I find myself returning to talk about them once again in the light of some of the Government’s latest spending (or removal of spending) plans.

Daniel Susskind had this to say about the role they are currently playing for the Government, to determine whether it is going the right way to achieve economic growth:

This was never meant to be the OBR’s purpose. Set up in 2010 by George Osborne, then chancellor, it was designed to solve a different problem: that the official UK public finance forecasts were not credible. The Treasury had a strong incentive to massage these numbers into better shape, whatever the political make-up of the government. And the belief was that an independent statistical authority would be free of that temptation. To that extent, the OBR is a success story: its forecasts do appear to be less biased.

At this point I need to stifle a snigger: less biased than what? I think it may not have a political reason for bias, but their methodology is like train tracks as I have maintained since this blog started in 2013: if you lay them out in a particular way then, even if you don’t want to call it bias, that is the way the train will run (to misquote Yes Minister). It may be statistically unbiased, in the same way that someone who misses a penalty past each post (I am sure that this analogy has nothing to do with my team going out of the Champions League this week) has, on average, hit the target.

However I agree with Susskind that the OBR was certainly never set up to advise on policy. As he goes on to say:

With that in mind, the idea that the OBR somehow knows enough to take each UK government policy and state its impact on growth to a single decimal point is fanciful. Yet that is what it will attempt to do at the end of the month, with immense practical consequence. A reduction of 0.1 percentage point in the OBR’s potential productivity growth forecast, for instance, is estimated to create a hole of £7bn-£8bn in the public finances — that is the equivalent of the entire budget of Defra.

Or the foreign aid budget or disability benefits or…the list looks likely to go on.

In an open letter this week, 17 major charities including Scope, Trussell Trust, Citizens Advice, Mencap, Sense, the Joseph Rowntree Foundation and the RNIB urged the Government not to cut the Personal Independence Payments (PIP) and the Limited Capability for Work payment, saying:

Scope’s analysis of government figures shows that without PIP, a further 700,000 more disabled households could be pushed into poverty. Life costs more for disabled people. Huge numbers already live in poverty as a result of these extra costs. The impact of any cuts to disability benefits would be devastating.

Meanwhile Roy Lilley looks at those cuts from the NHS end of the lens. I don’t agree with his assessment of the IFS, but there is nothing else here to argue with:

Currently, 2.9 million working-age adults are claiming disability benefits, an increase of 900,000 from pre-pandemic levels, with 500,000 attributing their main condition to mental health issues.

Lilley asks why this is, comparing the mental stress attributed to the pandemic with that of the Blitz. He then cites a study by the Tavistock Institute:

While, in the post war years, mental health issues were still stigmatised, post-war policies focused on social security and housing aimed to reduce economic stress that so often is the contributing factor to poor mental health.

We have done a lot to reduce the stigma of mental health issues, but:

I question the policies. Social and economic factors. Job insecurity and financial stress must be the key factors that have a negative impact on mental health well being.

Back to the Trussell Trust, who have been running a campaign for a while now to guarantee everyone the essentials to live on. As they say:

More than three quarters of people on Universal Credit and disability payments have already gone without essentials in the last six months.

Back to Lilley, who as I said, is primarily concerned with the NHS:

Since 2019 the NHS has experienced a 36% increase in patients seeking mental health services.

As he goes on to say:

Labour’s plan to cut benefits won’t solve the problem. It’ll very likely make it worse.

Policies cutting the root causes of people needing benefits, like safe homes and decent jobs would seem much more sensible.

Unfortunately Lilley’s “if there is one organisation worth paying attention to” IFS believe that OBR forecasts should continue to underpin the Chancellor’s spending decisions. I couldn’t disagree more.

That means constraining the Government to act as if all it knows is what the OBR knows. Which is precisely zero.

Madame, si c’est possible, c’est fait; si cela ne l’est pas, cela se fera

05. March 2025 · Write a comment · Categories: Actuarial, Economics, Regulation, Risk

*Trump mentions in BBC News US & Canada top feed around 4.30pm today. Out of 12 stories, 8 mention Trump by name in the headline* https://www.bbc.co.uk/news/world/us_and_canada

You will have all seen the work mug staple: “The Difficult We Do Immediately. The Impossible Takes a Little Longer”. The original quotation in the title, originally attributed to Charles Alexandre de Calonne, the Finance Minister for Louis XVI, in response to a request for money from his Queen, Marie Antoinette, appeared in a collection from 1794, this was a year after Louis and Marie Antoinette (but not Charles, who survived another nine years) died on the guillotine and five since George Washington had been inaugurated as the first President of the United States. It seems as if the seemingly impossible may need to be attempted once again.

So let’s start by expanding on the problem which I brought up in my last post. The problem goes much wider than Donald Trump. He is assembling a court of loyalists around him, in the style of a mob boss, which as has been observed by others, has been the prelude to fascism in the past. As Jason Stanley, Professor of Philosophy at Yale and author of Erasing History: how fascists rewrite the past to control the future, puts it: “the United States is your enemy”. There is also considerable circumstantial evidence to suggest that Trump is considered an agent of influence by Putin’s regime in Russia.

The difficulty of what I am about to suggest is also the reason why it is so urgent: our relationship with the United States (the one we keep needing reassurance by successive US Presidents of its special nature) is positively symbiotic. George Monbiot lists some of our vulnerabilities here:

Through the “Five Eyes” partnership, the UK automatically shares signals intelligence, human intelligence and defence intelligence with the US government. The two governments, with other western nations, run a wide range of joint intelligence programmes, such as Prism, Echelon, Tempora and XKeyscore. The US National Security Agency (NSA) uses the UK agency GCHQ as a subcontractor.
Depending on whose definitions you accept, the US has either 11 or 13 military bases and listening stations in the UK. They include RAF Lakenheath in Suffolk, from which it deploys F-35 jets; RAF Menwith Hill in North Yorkshire, which carries out military espionage and operational support for the NSA in the US; RAF Croughton, part-operated by the CIA, which allegedly used the base to spy on Angela Merkel among many others; and RAF Fylingdales, part of the US Space Surveillance Network. If the US now sides with Russia against the UK and Europe, these could just as well be Russian bases and listening stations.
Then we come to our weapon systems… among the crucial components of our defence are F-35 stealth jets, designed and patented in the US.
Many of our weapons systems might be dependent on US CPUs and other digital technologies, or on US systems such as Starlink, owned by Musk, or GPS, owned by the US Space Force. Which of our weapons systems could achieve battle-readiness without US involvement and consent? Which could be remotely disabled by the US military?
Then there is our independent nuclear deterrent, which is “neither British nor independent” according to Professor Norman Dombey, Emeritus Professor of Physics and Astronomy at the University of Sussex.

Then there is the sheer cost of rearming with Europe to the extent necessary in the absence of the United States’ support, suggesting 3.5% rather than 2.5% of GDP is what will be required, suggesting the UK Government, with its WCAIWCDI approach described here, will need to find something in addition to the foreign aid budget to ransack. I will be talking more about defence spending in a future post.

It is small wonder that some commentators, such as Arthur Snell, former Assistant Director for Counter-Terrorism at the Foreign and Commonwealth Office, conclude that disentangling ourselves from the United States may be impossible. And that is just considering defence and security considerations.

On the economy the symbiosis is just as evident. First of all there is the sizeable proportion of our imports and exports of both goods and services which are with the United States. Only in June 2023, we were trying hard to develop these further with something called the Atlantic Declaration. Although, as a recent speech by Megan Greene of the Bank of England’s Monetary Policy Committee shows, our trade with the US as a proportion has remained remarkably stable since 2000 at least.

Source: ONS and Bank calculations. Trade weights for each trading partner are calculated as the sum of bilateral exports and imports as a share of total UK trade. Data is annual and in current prices. EU refers to the EU27. Latest data point is 2023

Culturally, the United States is embedded in our laptops and mobile phones, our television programmes and movies, and our social media. Its concerns have permeated our language and our politics. A reasonable proportion of our political and financial elite have been to their universities and theirs to ours. Many of our employers have US parents: just in the actuarial world, two of the three biggest consultancies (Aon and Willis Towers Watson) are described as British-American firms, with the other one (Mercer) headquartered in New York. It has Apple. It has Amazon. It has Google. It has Meta and, of course, X.

And perhaps the greatest entanglement of our two countries is political, to the extent that we routinely send our politicians to each other countries to support election campaigns and our media breathlessly report every in and out of the US Presidential elections. We are lucky if a French or German one is mentioned more than a couple of weeks before it takes place. Whether it is the language thing (we are still VERY resistant to learning other languages) or the post imperial thing (feeling like we have a special understanding of the problems the United States face as a self-appointed global police force) or the degree of financialisation of our economy or for some other reason, it is very hard to avoid a sense of being conjoined with the United States of America.

But it is precisely because our relationship is so close in so many important areas that we are particularly vulnerable to US pressure – the harder it will be to disentangle ourselves, the more urgent it is that we do.

As David Allen Green puts it this week, the US is currently undergoing a diplomatic revolution. Originally applied to France’s realignment of all of its alliances away from Prussia and towards Austria, which ultimately led to the work mug motto at the start of this piece, the US appears to be realigning itself towards Russia and away from the UK and the EU. As Green goes on to say:

Other countries would now be prudent to regulate their affairs so as to minimise or eliminate their dependency on the United States – it is no longer a question of waiting out until the next United States elections.

And other political systems would be wise to limit what can be done within their own constitutions by executive order, and to strengthen the roles of the legislature and the judiciary (and also of internal independent legal advice within government).

The last seems key to me. We cannot, particularly now we are outside the EU, afford for our main ally to be capable of being so capricious. This applies whether the US are allowed to and do elect a President in 2028 who is respectful of its institutions and constitution. We always felt Americans were very respectful of their constitution because they never stopped talking about it, but it turns out to have been a thin veneer with little meaning. Much like our discussion of sovereignty in the UK.

The first thing we need to do is to stop obsessing about what John Mulaney memorably referred to as a “horse in a hospital” in 2019. Despite the fact that was five years ago and we have now seen a horse in the hospital before, many have been turned off news coverage altogether by the anxiety caused as a result of the constant media narration of what Trump and Musk have done next each day. The dangers of treating the Trump and Musk chaos as a TV show are potentially existential in the US but grave for us in the UK too.

While we may have deep sympathy for the people in the US and other countries caught up in the chaos, our priority has to be to get our own house in order. Otherwise we won’t be any help to anyone.

My priorities would be the ones I set out in October 2022, only now with much greater urgency.

We can’t have parties with only 20% of the popular vote (34% of a 60% turnout) having an absolute majority of 174 seats. We need proportional representation, so that every vote counts equally and perhaps we might get somewhere near the turnout of Germany’s last election of 82.5%.
Reform media ownership and promote plurality in support of a more democratic and accountable media system. The Media Reform Coalition has produced a manifesto for a people’s media which I support: it includes proposals for an Independent Media Commons – with participatory newsrooms, community radio stations, digital innovators and cultural producers, supported by democratically-controlled public resources to tell the stories of all the UK’s communities. As we know, our social media is controlled by Meta (with Facebook, WhatsApp and Instagram), all of which have more than 2 billion active users and Google with YouTube, also with more than 2 billion active users. X still has over half a billion, despite what Musk has done with it. In newspapers, 90% of daily circulation is controlled by three firms: News UK, Daily Mail Group and Reach plc (which has most of the local titles you’ve ever heard of, including the Birmingham Mail and Birmingham Live, as well as The Daily Express and the Daily Star).
Reform election finance. Recommendations for doing this were provided in the July 2021 report by the Committee on Standards in Public Life. There was an eye-watering amount of money spent in the US Presidential Election this time: The Democrats spent $1.8 billion and the Republicans $1.4 billion, with $2.6 billion and $1.7 billion respectively being spent by the two parties on the Senate and House races. In the UK, paradoxically, the relatively small amount of money donated to parties mean that they are potentially more vulnerable to well organised lobbying operations. This is why the offer of $100 million by Musk to Reform led for calls to restrict foreign political donations to profits generated within the UK.

This way we would be more resilient to the many ways that the current chaotic United States establishment can reach into our own politics and governance, and start to develop policies with broad support which can reduce our dependency on the United States.

Is we can’t afford it the new we don’t want to?

20. February 2025 · Write a comment · Categories: Economics

It started as soon as they came into government in July.

“If we cannot afford it, we cannot do it.”

This was obviously a rebuttal to the Keynes statement from the 1940s:

“Anything we can actually do, we can afford.”

The list of things “we can’t afford” started to grow, including:

Winter fuel payments for pensioners not on Pensions Credit. This cut the number of pensioners receiving the winter fuel payment from 11.4 million to 1.5 million and will save £1.5bn in the next financial year.
Stopping reforms to social care proposed by Sir Andrew Dilnot. These would have meant making the means test for local authority support more generous and raising the capital limit from £23,500 to £100,000. Estimated saving: £1 billion.
In April, the employer national insurance rates will increase (from a previous decrease we now “cannot afford”). These are forecast to raise between £23.8 billion and £25.7 billion a year, for the five years 2025/26 to 2029/30.

So far, so predictable, based on the we-cannot-afford-it-we-cannot-do-it (WCAIWCDI) philosophy. But then we had a tweak.

In response to criticisms of the decision to approve the construction of a third runway at Heathrow, the UK’s Business Secretary Jonathan Reynolds came up with a new formulation:

“We simply cannot afford to say we don’t build reservoirs any more, we don’t build railways, we don’t build runways. That’s not good enough, we will be left behind.”

Burrowing through the double negative we have a complete reversal of WCAIWCDI. Instead we now have we-cannot-afford-to-say-we-don’t-build-X, where X is something they desire to build. WCATSWDBX if someone wanted to reduce it to an acronym. Obviously you would have to be fairly determined to do so.

So we-can’t-afford-it can be used both positively and negatively it seems. We can’t do it if it is bad spending, we can’t afford to say we don’t do it if it’s good spending.

And now we come to defence spending as the US support for Ukraine starts to look highly conditional. We are still not sure whether this is in the WCAIWCDI or the WCATSWDBX camp. On the one hand, the PM has said that we are prepared to send troups to Ukraine, which sounds like WCATSWDBX. On the other hand, recent statements by the defence secretary and the PM also suggest that they are not considering anything beyond an increase in defence spending from 2.3% of GDP to 2.5%. Which sounds more like WCAWCDI.

Elsewhere there has been optimism amongst some (eg here and here) that the need to increase defence spending will topple the WCAIWCDI regime and allow other spending priorities in too. Others fear that any increases will just lead to further cuts to other public spending.

It’s no way to run a railroad. The government needs to be more Phoebe Buffay and just tell us what they do and don’t want to spend money on instead of telling us that we can’t afford things to avoid the discussion like an overbearing parent. Then we could have a proper family argument about them.

Going nowhere faster

29. January 2025 · Write a comment · Categories: Actuarial, Climate Change, Economics, Prediction, Risk

*Risk trajectory (black circle) shows the anticipated future state for the risk in 2050. Current risk position in grey. Source:* https://actuaries.org.uk/planetary-solvency

The excellent report from the Institute and Faculty of Actuaries and the University of Exeter Planetary Solvency – finding our balance with nature splits the risk trajectories into four sections: Climate, Nature, Society and Economy. I have focused on the Society one above as, in my view, this is the reason we are interested in all of the other ones. According to the Planetary Solvency report, we are on track for a society in 2050 described as follows:

Nature and climate risk trajectories will drive further biophysical constraints including stresses on water supply, further food supply impacts, heat stress, increased disease vectors, likely to drive migration and conflict. Possible to Likely risk of Severe to Decimation level societal impacts, with increasingly severe direct and indirect consequences of climate and nature risks driving socio-political fragmentation in exposed and vulnerable regions.

So what are we doing about it? Well the United States has just voted in Donald Trump as President. There was a flurry of executive orders issued in his first week (with the appropriate caveats about how many of these might actually be implemented), the climate-related ones of which are neatly summarised here by Bill McKibben:

The attacks on sensible energy policy have been swift and savage. We exited the Paris climate accords, paused IRA spending, halted wind and solar projects, gutted the effort to help us transition to electric vehicles, lifted the pause on new LNG export projects, canceled the Climate Corps just as it was getting off the ground, and closed the various government agencies dedicated to environmental justice. Oh, and we declared an “energy emergency” to make it easier to do all of the above.

Timothy Snyder has written about how to respond to tyranny in your own country. What is happening currently in the United States is threatening tyranny for many (as Robert Reich lists here):

The government now recognizes only two “immutable” genders, male and female. Migrants (now referred to as “aliens”) are being turned away at the border. Immigration agents are freed to target hospitals, schools, and churches in search of people to deport. Diversity efforts in the federal government have been dismantled and employees turned into snitches. Federal money will be barred from paying for many abortions.

The first thing you should do, according to Timothy Snyder, is to not obey in advance.

Most of the power of authoritarianism is freely given. In times like these, individuals think ahead about what a more repressive government will want, and then offer themselves without being asked. A citizen who adapts in this way is teaching power what it can do.

And how did we respond to all of this in the UK? Well Keir Starmer was keen to tell The Donald that we were deregulating to boost growth in their first phone call. His reward for this was the story that Trump thought he was doing a good job. Supposedly an endorsement from the “Drill Baby Drill” guy is the proper corrective from being told he should be locked up by the Nazi salute guy.

And then there were the actions on the environment. From the talking out of the Climate and Nature Bill which sought to meet new legally binding targets on climate change and protect nature. To a housing policy which will be both hugely environmentally destructive and fail to make houses more affordable. To announcing the intention to overhaul the planning rules, in the upcoming Planning and Infrastructure Bill, to reduce the power of people to object (and, as the Conservatives’ restrictions on protest have not been lifted, subsequently bang them up for years on end if we subsequently demonstrate about it) so that global firms would think that the UK was a “great place to invest” .

And then today we had Rachel Reeves’ big speech. Approval for developing the third runway at Heathrow, as had been extensively trailed, and the creation of “Europe’s Silicon Valley” between Oxford and Cambridge were the main announcements. There was quite a lot of talk about investment in sustainable aviation fuel (which means biofuels, the benefits of which have already been shown to be wiped out by rising demand).

And as for the Silicon Valley idea, I am not sure we want one. First there is the lack of real innovation despite the excellent game they talk. And second, is it going to be the authoritarian nightmare that the Californian one is turning into? The early signs are not good. Just last week Marcus Bokkerink, the Chair of the Competition and Markets Authority (CMA), was replaced by Doug Gurr, until recently Jeff Bezos’ head of Amazon UK. So not exactly standing up to Technofeudalism then.

According to Cory Doctorow:

Marcus Bokkerink, the outgoing head of the CMA, was amazing, and he had charge over the CMA’s Digital Markets Unit, the largest, best-staffed technical body of any competition regulator, anywhere in the world. The DMU uses its investigatory powers to dig deep into complex monopolistic businesses like Amazon, and just last year, the DMU was given new enforcement powers that would let it custom-craft regulations to address tech monopolization (again, like Amazon’s).

But it’s even worse. The CMA and DMU are the headwaters of a global system of super-effective Big Tech regulation. The CMA’s deeply investigated reports on tech monopolists are used as the basis for EU regulations and enforcement actions, and these actions are then re-run by other world governments, like South Korea and Japan.

When you see Trump flanked by Bezos and the other Tech Bros at his inauguration, it certainly feels like we are obeying in advance. Rachel Reeves’ speech had an enormous increase in energy demand implicit in pretty much every measure announced, which is expected because, GDP (the thing she is looking to boost) and energy consumption have been in lockstep forever. This is the implication of prioritising GDP growth over everything else.

What were missing were both a compensatory increase in renewable energy capacity and/or a reorganisation of our economy away from energy intensity. The problem for the government is that the latter would not increase GDP, so instead we get into the absurd position of the Business Secretary saying we “cannot afford to not build runways”.

However it seems that when the motivation is big enough (in this case to dispute the assertion that the Russian economy is doing well in wartime despite the official statistics, which the EU really needs to do in order to continue to make the case for sanctions) alternative ways to measure the economy can be found. In section 3.2 we find this:

The general assumption of connecting GDP growth to making people better off is not relevant in this situation, which should be included in any discussion of how the Russian economy is doing.

What is interesting about this analysis is that:

a. It is carried out by the kind of orthodox economists (the Stockholm Institute of Transition Economics) who believe GDP would be a good index to use in normal circumstances; and

b. They are saying this even if the GDP figures published by Russia are technically accurate. As they go on to say:

What this analysis suggests is that if we believe in official Russian statistics, then Russia has economic capacity to sustain current policies in the short run, a conclusion shared with many other observers. We also find, though, that beyond the GDP numbers, the redirection into a war economy is already putting pressure on all sectors not directly involved in the war, causing internal macroeconomic imbalances, increasing risks in the financial sector, and eroding export revenues and existing reserves. Short term growth is kept up by a massive fiscal stimulus, but the impact is mitigated by necessary monetary contraction to deal with inflationary pressures, and structural factors (demographics, weak property rights) limiting the possible economic response to the stimulus.

Some of which sound familiar closer to home – “necessary monetary contraction” (things we cannot afford) and “increasing risks in the financial sector” anyone?

We are currently facilitating a world where the only capacity we are increasing is to fly over the climate-ravaged areas of the globe and their fleeing populations. Fly Baby Fly is not going to get us anywhere we want to go.

Getting serious about politics

16. January 2025 · Write a comment · Categories: Actuarial, Climate Change, Economics, Regulation, Risk

When I started writing this blog in April 2013, one of its main purposes was to highlight how poor we are at forecasting things, and suggest that our decision-making would improve if we acknowledged this fact. The best example I could find at the time to illustrate this point were the Office of Budget Responsibility (OBR) Gross Domestic Product (GDP) growth forecasts over the previous 3 years. They do not appear to have improved much since then.

Fast forward to 2025 and apparently we have a crisis. Rachel Reeves has been forced to defend her budget following rises in 10 year gilt yields to levels not seen since the financial crisis and the Prime Minister has been forced to say that she will stay in post for the rest of Parliament. Everyone has piled in, from the former Deputy Governor of the Bank of England to the Institute for Fiscal Studies. So is there in fact a crisis? Well no, not really. As an opinion piece in the FT has pointed out, the drivers of the latest rate rise are not really UK-specific at all. Another piece in the FT puts the gilt yield “crisis” into yet further perspective. Finally, there is the comparison with the US gilt market, which moved above its 2008 level in 2022.

The reason for all of the hype of course is the totally self-constructed cul-de-sac that the Government has built around its economic policy options. Tiny movements in government debt or CPI or GDP or indeed gilt yields have been given heightened significance by being explicitly tied to how much the Government will allow itself to spend on its various programmes. As stated in the FT:

Only the OBR can accurately predict how much headroom the Treasury has against its fiscal rules, the Treasury insisted on Wednesday. “Anything else is pure speculation,” it added.

I refer back to the aforementioned forecast history of the OBR and ask how we ever got in a situation where their forecasts would determine how the UK government behaved. As the recent essay by Stefan Eich (on Adam Tooze’s Chartbook) points out, Keynes said:

“Our power of prediction is so slight, our knowledge of remote consequences so uncertain that it is seldom wise to sacrifice a present benefit for a doubtful advantage in the future.” It was consequently rarely right to sacrifice the well-being of the present generation for the sake of a supposed millennium in the remote future.

Meanwhile we are now doing precisely this on the basis of OBR forecasts. As Rachel Reeves set out at the start of her chancellorship in July, in a precise inversion of Keynes:

Because if we cannot afford it, we cannot do it.

Unfortunately for the government, while they spend all of their time trying to solve this imaginary problem they have created for themselves, there are actual real problems that do need to be addressed, and which are currently being drowned out by the noise of political commentators with too little of substance to talk about apparently.

So Sir Michael Marmot, author of the landmark Institute of Health Equity reports on health inequalities in 2010 and 2020 and the recent report on the role of the property sector in improving health, referred to the maintenance of the two child benefit cap as “almost a form of eugenics”.

The Trussell Trust reports that:

A record 9.3 million people face hunger and hardship across the UK. This includes 6.3 million adults and 3 million children. This represents one in seven (14.0%) people across the UK, and one in five (20.9%) children. Current levels are more than a third higher than they were 20 years ago, when 6.7 million people faced hunger and hardship.

And a group from the Institute and Faculty of Actuaries, in partnership with Prof Tim Lenton and his team from the University of Exeter, set out in a report today (Guardian summary here, Planet Critical discussion here) the dangers of the current massive underestimation of climate change risk. As Tim Lenton says:

The choice is simple: continue to be surprised by rapidly escalating and unexpected climate and nature-driven risks, or implement realistic Planetary Solvency risk assessments to build resilience and support ongoing prosperity. We urge policymakers to work with scientists and risk professionals to take this forward before we run the ship of human progress aground on the rocks of poor risk management.

The part which really stood out for me (in such contrast to the equally massively exaggerated risks ascribed to movements in bond markets this week) was on the inadequacy of global risk management practices:

Policymakers often prioritise the economy, with their information flows focused on this. But our dominant economic model doesn’t recognise a dependence on the Earth system, viewing climate and nature risks as externalities.
Climate change risk assessment methodologies understate economic impact, as they often exclude many of the most severe risks that are expected and do not recognise there is a risk of ruin. They are precisely wrong, rather than being roughly right.
The degradation of natural assets such as forests and soils, or the acidification and pollution of the ocean, act as a risk multiplier on the impacts of climate change and vice versa. Traditional risk management techniques typically focus on single risks in isolation, missing network effects and interconnections, underestimating cascading, compounding risks.
Current risk management approaches fall short of the RESILIENCE principles detailed in this report for realistic and effective risk management. Consequently, policymaker risk information is likely to significantly understate the potential impact of climate and nature risks, weakening the argument for urgent action.
These limitations mean that policymakers are likely to have accepted much higher levels of risk than is commonly realised.

If policymakers judged these risks on the same calibration scale as they current view the knockabout on financial markets I doubt we would ever hear about the intricacies of the 10 year gilt yield or the decimal places of CPI ever again. Similarly, if the societal impact of prolonged policies targeting the poor was included (perhaps in the form of meaningful measures of poverty based on the work of the Social Metrics Commission), rather than the level of the FTSE 100, we might start to make inroads into the current dire statistics.

We have hard problems to solve which require a serious government prepared to be bold, do big things and take the political risk of doing so (because the political risks are so tiny compared to the actual risks the population face), not one so focused and constrained by minutiae that it defeats itself.

Elon Musk’s move into politics: Yanis Varoufakis and Cory Doctorow on Fighting Billionaire Control

10. January 2025 · Write a comment · Categories: Economics, Regulation, Science Fiction

Came across this on YouTube today and it was such a brilliant discussion in the same area as my post from yesterday (which went out before I had seen this), but which went much further in a number of really interesting directions, that I thought many of you would be interested. Look out for a mention early in the video for the late great Iain Banks, science fiction fans!

Where there is no profit

09. January 2025 · Write a comment · Categories: Actuarial, Climate Change, Economics

I thought I would return to a point I raised in my musings on Deadmeat before Christmas, because it has probably got the most reaction from readers of the blog of anything I wrote in 2024. Most of the reaction, it has to be said, was disbelieving. The point in question was this:

And this is the key I think. What economists call “public goods”, goods which are non-rivalrous (ie your use of the sun’s energy does not stop somebody else’s unless you put them in the shade) and non-excludable (ie you cannot easily stop someone else from using it, in this case by sticking a solar panel on their roof), are very difficult if not impossible to make a profit from. Private markets will therefore not provide these goods, possibly at all without extremely artificial regulation (something we have probably had enough of with our utilities in the UK) and certainly not in the quantity that will be required.

Economics by Sloman, Garratt and Guest, which informs the Institute and Faculty of Actuaries’ core reading for its Business Economics syllabus states (in its 10th edition) that a pure public good is:

A good or service that has the characteristics of being perfectly non-rival and completely non-excludable and, as a result, would not be provided by the free market.

It then goes on to say that:

There is some debate as to whether pure public goods actually exist or whether they are merely a theoretical idea.

This I think brings us back to the extremely artificial regulation I mentioned above, as a lot of the economists who have got their views into this book (the sort that have contributed to the “debate” over whether pure public goods exist) appear to struggle with the idea that markets cannot provide everything better, even if you have to embark on some pretty tortuous contortions to create them.

My conclusion in my previous post was as follows:

Therefore if the private sector will not provide public goods and renewable power is predominantly a public good, then it follows that renewable power needs to be in public ownership. And if the climate crisis requires all power to be renewable and zero carbon, which it does, then it also follows that the entire power sector ultimately needs to be in public ownership too.

However I now realise that this is not quite correct. There is an alternative to public ownership. Not the ridiculous quasi-markets which bedevil our utilities in the UK currently, which I don’t expect to be with us for many more decades, but something else which is alive and well and in the process of taking over capitalism as we know it: private monopoly.

As Yanis Varoufakis says in Technofeudalism about green energy in particular:

Advances in green energy are pushing down fast the costs of green electricity generation. Even though the life cycle of fossil fuels has been extended, ruinously for the planet, cloud-based green energy is growing – and, with it, so is the relative power of cloudalists.

“Cloudalists” are our modern feudal lords. Whereas capitalism was a system in which the most powerful people as owners of capital were able to dictate how and where workers could use their capital to make profit for them, under technofeudalism the money is made as rent.

In the section entitled “The New Enclosures” Varoufakis says:

“In the eighteenth century, it was land that the many were denied access to. In the twenty-first century, it is access to our own identity.” Expanding on this:

Strewn across countless privately owned digital realms, it has many owners, none of whom is us: a private bank owns your ID codes and your entire publishing record. Facebook is intimately familiar with whom – and what – you like. Twitter remembers every little thought that caught your attention, every opinion that you agreed with, that made you furious, that you lingered over idly before scrolling on. Apple and Google know better than you do what you watch, read, buy, whom you meet, when and where. Spotify owns a record of your musical preferences more complete than the one stored in your conscious memory. And behind them all are countless others, invisibly gathering, monitoring , sifting and trading your activity for information about you. With every day that passes, some cloud-based corporation, whose owners you will never care to know, owns another aspect of your identity.

As Cory Doctorow says in his review of Technofeudalism:

Varoufakis points to ways that the cloudalists can cement their gains: for example, “green” energy doesn’t rely on land-leases (like fossil fuels), but it does rely on networked grids and data-protocols that can be loaded up with IP, either or both of which can be turned into chokepoints for feudal rent-extraction.

To make things worse, Varoufakis argues that cloudalists won’t be able to muster the degree of coordination and patience needed to actually resolve the climate emergency – they’ll not only extract rent from every source of renewables, but they’ll also silo them in ways that make them incapable of doing the things we need them to do.

When did we get so complacent about private monopolies? As Cory Doctorow reminds us in The Internet Con, in the 19th century debate in the US Senate about monopolies, Senator John Sherman (of the 1890 Sherman Act) gave the war against monopolies equal importance to the recently won War of Independence from the British Crown:

If we will not endure a King as a political power we should not endure a King over the production, transportation, and sale of the necessaries of life. If we would not submit to an emperor we should not submit to an autocrat of trade with power to prevent competition and to fix the price of any commodity.

The “harmful dominance” theory of antitrust (ie the idea that companies which dominate an industry are potentially harmful just because they are dominant, before they even start to abuse their dominant positions) led to the dismantling of several “empires”, including that of Rockefeller’s Standard Oil Company in the early 20th century.

But the power of the Varoufakis’ cloudalists vastly exceeds anything Rockefeller (oil), Carnegie (steel), Vanderbilt (railroads and shipping) and, of course, JP Morgan could muster even at the height of their influence.

Which brings me back to my original contention that the energy sector needs to be in public ownership. There may be many other “necessaries of life” which we may also want to consider bringing back into the public realm if their provision is otherwise going to slip beyond our regulatory grasp. Because the alternative is to relinquish any last vestiges of control over how we run our lives to puffed up billionaires. If you object to Elon Musk conducting polls about whether to stage a coup in the UK, then it is probably worth expending some effort on trying to stop someone like him deciding whether you can heat your home, cook a meal or charge your phone.

Happy New Year!

03. January 2025 · Write a comment · Categories: Cartoons, Economics, Professions, Risk, Science Fiction

Happy new year to everyone who reads this blog! I am planning for there to be quite a lot more activity here in 2025, moving from an average of one article a month to at least weekly. There should be more cartoons too – Pinhead and Spikes even made it to our Christmas cake this year.

There is a lot I want to write about this year. Expect some or all of the following themes in the next few months (in no particular order):

Some examples using Steve Keen’s Ravel software to demonstrate how Government debt is not the constraint they think it is.
Extending Naomi Alderman’s argument in The Future that we could get rid of the Tech Bros and not miss them, effectively upending Ayn Rand’s ideas in Atlas Shrugged. They are not key workers.
Keynes’ argument that, with the future so uncertain, we should not sacrifice people in the present to our models of it.
Spiegelhalter on the four types of luck, which cuts away at the meritocracy argument for distributing wealth.
How the professions have become a way of solidifying and enabling the massively uneven distribution we see. Have they outgrown their usefulness in their current form, just like the guilds did?
How the choice for providing public goods appears to boil down to public ownership or private monopoly – with accompanying Technofeudalism replacing capitalism. Why are we so much more relaxed about private monopolies than we were 100 years ago, when it accelerates inequalities so much?
The relationship between worldbuilding in science fiction and people living in their own models in the policy making world. Great example of this just this morning in the FT.

So plenty to do. If this sounds interesting to you, please stick with the blog, which will not be going to Substack and will not be charging a subscription. If it sounds really interesting to you, tell a friend! Will be in touch again soon.

Deadmeat was overshot

18. December 2024 · Write a comment · Categories: Actuarial, Cartoons, Climate Change, Economics, Regulation, Science Fiction

Picture of Pinhead character wearing a Deadpool type mask made out of one of his ties

Imagine a super-hero who could not be killed. No I don’t mean Deadpool. A more apt name for our super-hero would be Deadmeat. Deadmeat is empirically dead, but, rather like the Monty Python parrot, is being energetically kept alive by the pretence of its continued existence amongst all of those around it. So much so that it becomes impolite to expose the pretence and point out that Deadmeat is in fact dead. If you really push, and someone likes you enough to want to give you an explanation, you will have a hand put on your shoulder and be led away to a corner to have the pretence explained to you. What that explanation turns out to be is something like this. Deadmeat is of course the Paris climate agreement from 2015 which committed 193 countries plus the EU to “pursue efforts” to limit global temperature rises to 1.5C, and to keep them “well below” 2.0C above those recorded in pre-industrial times.

Deadmeat, it turns out, wasn’t shot. Deadmeat was overshot. Under overshoot, we bring the terrible thing back under control after it has done the damage and hope we can fix the damage at a later date. It’s a bit like the belief in cryopreservation or uploading our brains into cyberspace in the hope that we can have our bodies fixed with future medicine or be provided with artificial bodies. It means relying on science fiction to save us.

Andreas Malm and Wim Carton have considered this approach and how we got here in their latest book Overshoot. For me there are two big ideas in this book, although the account of how things definitively got away from us immediately post pandemic and exactly how that played out is mesmerising too. I thoroughly recommend a read.

The first big idea is the problem with the justification for overshoot in the first place, which is that at some point in the future we will be so much richer and more technologically advanced that it will be much easier to bring carbon dioxide levels down to sustainable levels than to try and stay within sustainable levels now. In what they call “The Contradiction of the Last Moment” Malm and Carton show how an intense fresh round of fossil fuel investment is almost certain to occur close to a temperature deadline (ie fossil fuel companies rushing to build more infrastructure while it is still allowed), whether it is 1.5 or 2 degrees or something higher. Then, as they put it “the interest in missing it will be overwhelmingly strong”. If an investment is 40 or 50 years old, then it might not be so disastrous to have it retired, but if a fossil fuel company has invested billions in the last few years in it? They will fight tooth and nail to keep it open and producing. And by prolonging the time until the retirement of fossil fuel infrastructure, the capital which has used the time to entrench its position and now owns a thousand new plants rather than a few hundred will be in a much stronger position to dictate policy. The longer we leave it, they argue, the harder it will become to retire fossil fuels, not easier.

The second big idea explains why, despite the enormous price collapse of solar power in particular, there is no Big Solar to compete with Big Oil. As they put it “there was no Microsoft or Apple or Facebook. More broadly, there was no Boulton & Watt of the flow, no Edison Machine Works, no Ford factories, no ascendant clusters of capital accumulation riding this wave.” The only remotely comparable company would be Tesla, but they produced cars. Why is this?

Malm and Carton talk about “the scissor”, the difference between the stock of the fossil fuel industry and the flow of renewable power. Fossil fuel’s “highly rivalrous goods: the consumption of one barrel of oil or one wagon-load of coal means that no one can ever consume it again. Every piece of fossil fuel burns once and once only. But supplies of sunlight and wind are in no way affected by any one consumer’s use.”

In Postcapitalism, Paul Mason discussed the options when the price mechanism disappears and additional units of output cannot be charged for. As he put it:

Technologically, we are headed for zero-price goods, unmeasurable work, an exponential takeoff in productivity and the extensive automation of physical processes. Socially, we are trapped in a world of monopolies, inefficiency, the ruins of a finance-dominated free market and a proliferation of “bullshit jobs”.

This also ties in with my own experience and others I have spoken to over the years about how hard it is to invest outside of fossil fuels and make a return.

And then the motivation for overshoot becomes clear and how high the stakes are: not just the proceeds of the sale from one dead parrot as it turns out, but the future of private power generation. My fear is that the Deadmeat franchise may end up having as many sequels as Godzilla (38 and counting). With the potential to do rather more damage in the process.

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