Soros on my side, but economists I respect say LEAVE

Spookily,  a couple of day after I claimed on this blog that it would be economically foolish to leave the EU,  George Soros claims the same, citing pretty much the same reasons to my own, in the same order.

  1. UK currency could fall in value, making it poorer
  2. huge current account deficit means UK is in weak position
  3. manufacturing sector is unable to prosper following Brexit

On the other hand, some economists and economic commentators whose opinions I generally like and trust all suggest to vote for Leave.

Yesterday Professor Richard Werner stated his reasons, pointing out Norway and South Korea can prosper, and that the EU is a part of the USA’s sphere of influence which is likes to control and also covertly finance. The EU’s have recently, under the influence of the USA, led to economically counter-productive sanctions on Russia.  And the EU has not learned from the Eurocrisis which it was barely able to resolve.  The EU thinks future integration is the answer. The five Presidents’ report makes that clear – the wrong recipe, thinks Werner.

Professor Steve Keen also states his reasons for leave, citing the problematic Euro currency area and undemocratic nature of the EU, and the Eurozone’s insistence on budget surpluses , which cannot work.

Larry Elliot in the Guardian sees the treatment of Greece and the unflexible Eurozone elite as problems, and does not believe a democratisation, as envisaged by Varoufakis would work.

And finally, Ambrose Evans-Pritchard, from the Daily Telegraph, who, albeit only reluctantly voting for Leave,  cites a democratic deficit, and a abrogation of national law to the European system and European Court of Justice as his reasons.

So all of these commentators list valid and thoughtful reasons why the EU is not working well. It is irredeemable, and people should vote for Leave. I disagree, although the deficits of the EU are blatantly obvious.

As I said before, for me the inability to tackle unemployment is the over-whelming indicator of the EU’s failure. (The critics above also see that as a big problem). The ECB currently prints money, Euro 80 billion a month. Instead of using it fight unemployment, it buys bonds from governments and corporates.

The EU Juncker fund, a Euro 315 billion investment fund launched in November 2014, to spend that money to fight unemployment seems to have been singularly ineffective. The money was to be spent by the end of 2017. Where is it? Unemployment rates of 20% in the South of Europe, with youth unemployment at up to 50% remain a symbol for the failure of economic policy within the EU.

If you think that this will always stay that way, and there is little to no chance of redemption, as the critics of the EU above might think, vote for Leave.

If you believe, as I do that, eventually, the right policies will be taken to tackle unemployment (more balanced trade and less balanced budgets and employment programs) vote Remain.

Voting Remain will not endorse the draw-backs highlighted by the critics above. It will give us a chance to influence the EU (by influencing our government which influences others) and change them.

 

 

 

 

 

 

 

 

A Brexit vote will not mean Brexit

If we want to keep peace, influence and a healthy economy, we should all vote for Remain.

1) Peace

Millions died in wars in Europe over centuries. Since the creation of the European Union, former enemies have become friends. They have remained friends since, and 28 nations now are part of this club. More want to join this club which is built on co-operation and compromise.

The European Union is not the only guarantor of peace, but it is an important element.

2) Sovereignty and Influence

Clearly, most sovereignty can be exercised by staying part of a club, where European governments meet on an almost daily basis (different parts of government, of course) all aiming to enhance the well-being of its citizens.

Democratic deficits in Europe? Yes sure, too much power, perhaps, for the Commission, and “Five Presidents”, none of whom has been elected directly by the people of Europe. And the EU is too easily captured by lobby interests of industry and neo-liberal agendas. But that is true of most national governments.

But, by leaving, that place on the top table goes. But rules and regulations, as Switzerland and Norway find, have to be adhered to.

The EU is an institution where compromises are made and deals are negotiated. None have directly caused any harm (the high unemployment in the South of Europe is an exception), all have essentially as an aim to make us wealthier and cooperate with each other. An element of solidarity, to help the poorer nations is woven into the fabric of the EU. All agreements and treaties been entered into in good faith by the parties making these. The UK, as the second biggest country in the EU, has major influence.

Why give this influence up?

3) Economy

The UK is the fifth biggest economy in the world. But if the value of the pound falls by only 10% after a Brexit, it becomes the 6th, after France. If the £ falls further, by one third (much less likely), the UK could fall behind after Italy and India.

The advocates for Brexit promise a land of hope and glory devoid of manufacturing and based mainly on services (according to their loony economist Professor Minford). This is to negotiate trade deals all over the world more beneficial than what is on offer now.

Let us be realistic. The UK lives at the moment by selling its real estate to foreign tax evaders who buy up London where supply is artificially restricted by the government. That finances to a large degree the largest trade deficit of any economy anywhere at about 7% of GDP. The reason that deficit is so big is because the UK’s entrepreneurs and industrialists cannot provide sufficient goods and services which the rest of the world wants to buy. They are insufficiently competitive on the world market, compared to, say, Germany or China. Trade deals are irrelevant here.

Further, the historic track record of the UK coming to negotiated beneficial trade terms is poor.

a) It is hard to pretend the slave trade was based on negotiation.

b) England went to war with China to sell it opium – enforced trade by gunboat diplomacy.

c) Later it lost control of its colony in America, which did not like the fact that they had to pay duty on the tea which the English traders sold it. Another trade deal gone seriously wrong.

d) And more recently, having had the Empire or later teh Commonwealth as a virtual captive markets for its industrial goods, the UK  nevertheless managed to lose all its competitive advantages in its former colonies, rather than become a major supplier of cars, trucks or machine tools.

But all of a sudden now trade is to flourish, based on new trade terms with the rest of the world, whilst rejecting existing terms with our biggest trade partner, the EU. That is sheer lunacy.

Only fantasists and propagandists like Gove and Johnson believe that Brexit will be good for the economy and trade, to tear up existing arrangements which firmly embed the UK in Europe. It will prove to be impossible.

We will have an arrangement, at best, like Norway with the EU. All the cost, all the immigration, but none of the sovereign decision-making.

How does that take back control? If people want to vote for Brexit, brainwashed into believing by a jingoistic press that this is in their favour, fine. Risk peace, good-will, co-operation, and the economy, by all means, if you are foolish enough.

What to do if there is a Brexit vote? Kick it into the long grass

What should David Cameron do if there is a vote in favour of Brexit? He should not resign, as no leader should resign in a time of economic danger to the nation.

But he cannot immediately start Brexit procedures. About 172 Tory MPs are for Remain, with only 132 for Brexit. And the rest of the House of Commons is mainly for Remain.

MPS

So, no Brexit vote could muster a majority in the House of Commons.

Cameron will not risk  a General Election, so a Brexit will have to be postponed. Which is just as well, as the proposers of Brexit have not been able to say in detail what a Brexit will look like. Cameron could rightly say that the country has no plan for Brexit, no plan on “how to take back control” and the Brexit plan has to be drawn up first.

So Cameron could set up a “Brexit Commission” to look in detail at the feasibility of Brexit and provide the country a framework which it could possibly vote for at the next general election. This  commission (made up of  Gove/Johnson/Patel/Grayling as well as employer, union and other NGO representatives) is to report in 2019.

It would have to liaise with the EU and other countries, so see what deal would be possible. It is to set out a detailed change to the current immigration system, to see if that would meet the needs of the nation and the electorate taking into account the rules of the EU. And the Brexit Commission would need to specify where exactly the sovereignty of the nation is hindered by the EU, and where it is enhanced.

We will find that a Brexit plan will be lunacy and not enhance power or wealth of the UK. Nor will it reduce immigration. Nor will it “take back control”. A Brexit plan will not be part of a Tory manifesto for 2020.

So the Brexit plan will be quietly shelved, along with Gove and Johnson. They can then join UKIP , if they want.

 

Economists and immigration – No wonder people vote for Brexit

Finally immigration becomes an issue which is openly acknowledged by at least the Labour party in the current Brexit discussions.

Economists have missed most of the underlying issues here. Their analysis has been less than helpful. The commentary by Reenen et al, Portes, Wright-Lewis, or here from the Institute of Fiscal Studies and others has been all along the lines of:

a) immigrants pay their way and pay into the tax system more than they take out therefore they are good for the economy
b) lack of housing, school places, NHS services has nothing to do with immigration, that is all due to lack of government investment
c) smaller wages through immigration, no evidence, maximum 1 penny less per hour each year through increase in immigration

This breathtakingly simple analysis is really astounding and is, of course further indication that economics is the science of mixing up stocks (in this case national wealth) with flows (let us call it GDP for these purposes). The cost/benefit analysis of immigration deserves more analysis.

Each immigrant, for a start, needs housing, a very scarce and expensive resource currently in the UK. This housing is becoming more scarce and more expensive with each new immigrant. Each newcomer needs to take up, say, £100,000 of housing stock, which will mean that less is available for everyone else. Even working full time, someone will have to work many years to accumulate enough to be able to pay for the construction of a new property. Many on the minimum wage will never be able to do so.

We also know that no immigrant will first build or pay £100,000 for his new accommodation. However, before he or she starts his/her first shift either a house, flat or shared room has to be available. So the wealth (stock) per person, here the amount of housing per person, goes down with each new immigrant. We all have to squeeze up or pay a significantly higher amount for rents or property, driven higher by more demand. Each immigrant makes us poorer – when measured in available housing per person.

So that is, of course, what everybody is complaining about, justifiably. Wealth per person (housing/schools/NHS) is ignored. GDP is all what counts for our myopic economists. Average stock of national wealth per person is brushed over, only the flow into the economy by additional GDP counts.

Now, social housing, schools, and additional NHS services can, of course, be provided, but at a cost of taxes from all of us, which includes to a very small part also the immigrants. But just last year a government was voted in keen on reducing taxes. So nothing adds up.

So justifiably, Brexiteers are intent on voting against immigration.

Further, there is the second problem. The Paradox of Immigration, just like the Paradox of Thrift, could well mean that the economy is better off with immigration, while the individual loses out significantly. Immigrants allow us to generate more GDP, no question. But to insist, as Jonathan Portes does, that it reduces wages by only a penny per hour cost is a highly dubious claim.

This relies on the Bank of England analysis by two economists, who could tell us, allegedly, exactly what effect the additional supply of labour through immigration had on wages.

Now, although that is an interesting stab in the dark, it relies on the model being correct. What the Bank of England economists are essentially doing here is forecasting prices in a freely traded commodity. Their analysis went trough boom and bust cycles of the economy, but whatever the cycle, apparently immigration costs the economy not more than 1 penny an hour off their normal wages.

If economists were that brilliant with their pricing models, they could, of course, predict the price of copper, oil or other commodities. However, as we all know, prediction of market prices is more complicated. But for immigration we are all supposed to believe that two economists at the Bank of England know what the effect of immigration on wages are. That is just ludicrous. The model tells you an penny an hour, but it could of course be much more. The model could be completely wrong.

Further, economists are working with averages. So the average immigrant works for up to 13.5% less wages than the average UK worker in some industries. (see Table 6 of the Bank of England study) However, in some circumstances immigrants will be happy to do the work for less than 50% of the previous going rate.

For the individual employer it is the marginal costs which counts. Immigration allows employers to take advantage of a marginal cost reduction in the price of labour which would not be there if there was no immigration and leads to smaller pay-increases.

This graph comes out of the  LSE study (Reenen at al.).

wages

It shows a very huge association between increased EU immigration and lower wages. How come that before 2004 wages were rising, only flattening out when immigration from EU countries started? And as immigration continued to climb after the 2008/09 recession, wages were actually falling? This correlation is difficult to explain, other than immigration has a significantly detrimental effect on wages. Higher supply meant that the price of Labour fell. (The LSE does not provide a satisfactory answer and brushes over the issue.)

Brexiteers are right to feel that the impact on wages on immigration is far higher than estimated. The graph seems to confim that, showing a significant decline in wages going hand and hand with increased immigration after 2008.

Summary and way forward

Economists only assess the effect on increasing GDP (flow) and not on decreasing average wealth (stock) when assessing impact on immigration. For the individual in the job market it is the marginal impact of immigration is the effect they see. Economists ignore that marginal impact on immigration and look at the average. They have a model which suggests the cost of immigration on wages is minimal, but as any model, it is unlikely to accurately predict prices in a market economy.

The cost of immigration is externalised. A fund, as Labour and Jeremy Corbyn suggested, to deal with the cost of immigration makes that very explicit. The fact that no analysis has been performed on how high the cost is. That is more than surprising, given that immigration has been a concern for voters for a long time. At least some economists have acknowledged that there is a cost. If my estimate is correct, and each immigrant needs at least £100,000 of housing, the cost of providing that housing is approximately £30bn before they start to work. The addition to GDP from these immigrants would perhaps be £6bn a year.

Paul Mason makes some good suggestions here how this issue of immigration should be dealt with. He suggests, among other things, increasing minimum wages and a levy on employers who employ immigrants. Yvette Cooper makes other points in the Guardian today, again explaining what an impact fund would look like. Maybe this thinking should go further. If employers (who are the main beneficiaries from immigration) were forced to provide housing (or pay into a housing levy) for immigrants, the relative attractiveness of immigration labour would of course fall.

We might be stumbling into a Brexit. The inability of the political classes to address immigration will have been the main driver for Brexit.

Economists are guilty, as their perfunctory analysis which addresses only some of the issues with immigration (the benefit to GDP), should have been much more thorough. Clearly the country must be able to address these issues thoroughly, aided by detailed analysis, even though an analysis which also addresses the costs of immigration could be seen to help bigots and racists. To avoid that analysis will back-fire.

The costs of immigration (loss of average wealth) should have been made much more explicit, and remedies to deal with these costs should have been advocated earlier than one week before the referendum. Concessions by a Labour party, which is not even in government to implement them, will not change the mind of Brexiteers, I fear.

Diesel power generators instead of electricity storage – are we mad?

Only a week after the Hinkley Point C nuclear power station contract has been signed with the French, power provision is back in the news. First it is that summary of failures, which are highlighted in the New Statesman article.

In more detail, there are the following bits of information:

First of all the FT this week exposed the scandal surrounding a £436m government subsidy for diesel power generated electricity, similar to the electricity provisions in much of the 3rd world. (Unfortunately the FT does not explain when exactly the diesel generating capacity is expected to be used.)

And a day later we have, due to failures of power generation plant, a power emergency in Britain, which leads to temporary price rise for electricity to 40 times the normal level for wholesale electricity for the last few percent of electricity which are required to keep the power on in Britain, ie the National Grid in action. That is £2.40 per kwH instead of 6 pence which is usually paid to prevent the lights going out!

That record price was paid, as well as the National Grid asking some of UK industry to turn on some of their back-up generators and take their power requirements from these generators, rather than from the national grid.

Clearly, electricity production and demand management is a complex issue, but to make some sense and compare these issues, please look at the following table.

nucl_options

We have also included an alternative which should of course be considered, the provision of electricity storage, to meet the peak demands for five hours each day, which are generally between around 4pm and 9pm.

Hinkley Point C:

To recap the Hinkley C deal, it will produce 22TWH of electricity a year, of potentially dangerous nuclear power. Once completed the power station will add to the much needed base load of electricity.

My main point of concern is this: If the UK were to finance the power station itself, rather than the French/Chinese builders financing it, it would cost a lot less. At the moment the UK is contracted to pay 10 pence per kWH of electricity produced, to ensure a return of capital of more than 10% to the French/Chinese.

Let us say the UK government would finance it, all £18bn, and pay for the cost of running it and maintaining it. If we were to allow for £100m per year each for fuel costs, staff costs (1,000 at £100,000 per year) and maintenance costs, that will come to an estimated £300m a year. We then add that to the financing costs (reducing £18bn mortgage payment at 0.5% interest a year over 35 years = £560m/year) the total costs would be £860 per year.

Instead we will be paying £2.2bn for electricity a year for the 22 TWh of electricity to be produced each year for 35 years, 2.5 times the costs of financing and running the project ourselves.

Costs of electricity will increase in line with inflation.

Diesel generators:

We are assuming here that the diesel generator capacity of 1.5GW of electricity is entirely financed by the taxpayer. Should the deal go ahead, as set out in the FT, the taxpayer will pretty much buy the generators for the electricity producers. The cost of a small generator at a builders’ merchant is 30 pence per watt power output. Assuming the same cost for big industrial plant, we come to a total bill for buying diesel generators of £450m for the 1.5GW output, which is approximately the £436m which the government has set aside as a subsidy.

We do not know how long the generators are expected to run each day, if at all. So we assume we only run them at peak time each day for 5 hours, when electricity demand is highest, similar to pumped hydro plants, which run only for a few hours each day.

Running the generators is expensive, approximately 30 pence per kWh, based on current diesel prices. If they were to run for 5 hours a day, to meet peak demand between 4 pm and 9 pm , just the fuel costs would be £820m a year to produce 2.7 TWh of electricity a year.

Costs of running the diesel generators will increase in line with the cost of diesel fuel.

Electricty storage:

We could, if we needed electricity each day for only 5 peak hours each day, invest in a a big and snazzy battery. That would then give us the 7.5 GWh of storage capacity, which we would need to produce the same amount of electricity for 5 hours a day as the diesel generators.

The cost of this would be only one third of using the diesel generators, and at an approximate cost of 9 pence per kwH for peak power demands, which would be lower than the nuclear energy which will be delivered at base load.

The cost of electricity will increase with inflation, but the cost of storage are likely to fall further.

The three major points to make

1) Hinkley Point C is expensive, because the finance-and-operate deal based on guaranteed prices will make it the most expensive PFI contract in the world. If the UK government was to finance it at very cheap finance rates, and run it, it would come in at about 40% of the costs. That would mean a kwH of electricity would cost only 4 pence rather than the 10 pence as agreed in the contract.

2) Diesel power generation at 30 cents per kwH is uncompetitive, so we do not want to run it in the UK ever, other than in dire emergencies! If we need back up diesel generation capacity, the capital costs of the diesel generators are so cheap, there should be no need for the government to provide a subsidy. Instead, the government could ask the main suppliers of electricity to provide a 10% reserve of their normal generation capacity which they can call on at any time. That would not cost the government anything, the cost would be borne by the supplier.

The subsidy for diesel generators is simply mad.

3) The analysis above shows that storage of off-peak electricity is already a viable option for dealing with peak demand.

Conclusion

The conclusion is these government choices are bad for the consumer providing high costs (Hinkley) and high carbon solutions (diesel generators).

It is a scandal that the government provides subsidies for industry which amounts to essentially buying all the diesel generators for electricity producers to provide 1.5GW power, which they should buy themselves through mandatory government regulations.

The government should invest in electricity storage solutions, which, as the above calculations have shown, have the potential (if recharged by low price off-peak electricity) to be already cheaper than the Hinkley nuclear power station. They do not have the radiation risks of nuclear power. And storage costs are likely to fall further.

These are of course issues the Labour opposition (or any government opponent) should repeat: that the current government wastes about £1bn a year for 35 years on Hinkley Point C and that it provides a subsidy for almost £0.5bn for the electricy generators to buy diesel generators.

While at the same time not investing in new technology, such as battery storage solutions, which are already viable alternatives for peak power needs.

_____________________________

Sources and Assumptions:

all electricty prices are wholesale prices

Hinkley Point C:

10 pence per kWh electricity for Hinkley is based on 9.25p of 2012 figures + inflation since then. The price will go up in line with inflation before the plant comes on-line.

100m each for staff costs, fuel costs, and maintenance costs per year, toatalling £300m per year are my estimates.

Diesel generator:

Cost of generator: 30 pence per Watt of power- expected life time 10 years

http://www.justoffbase.co.uk/22kVa-1500rpm-Three-Phase-Diesel-Generator-Hyundai-DHY22KSE?gclid=CIi08ei5-8gCFUQ6GwodJgMFdw

Fuel costs 30 pence per KWh:

https://en.wikipedia.org/wiki/Diesel_generator#Typical_operating_costs

http://www.dieselserviceandsupply.com/Diesel_Fuel_Consumption.aspx

Battery Storage

Battery costs: $3,500 (£2,400) per 10KWh storage

http://www.theguardian.com/technology/2015/may/01/tesla-announces-low-cost-solar-batteries-elon-musk

Battery recharging costs:

Wholesale off-peak electricity prices on average about 4 pence per kWh:

Battery life time about 5,000 charging cycles, about 14 years.

http://cleantechnica.com/2015/03/04/energy-storage-could-reach-cost-holy-grail-within-5-years/

Hinkley Point C: worst deal ever, huge profits for ruthless China!

artist’s impression Hinkley Point C                                 source: Guardian

Yesterday we showed that the Hinkley Point C power station will guarantee the builders, a consortium of French and Chinese state owned companies a return of 11% on their £18bn investment. The UK will buy electricity at around £2bn for the next 35 years from the power station, resulting in that that profit.

So a £18bn investment will yield a total return of £70bn for the French and Chinese!

The government could have financed £18bn over 35 years for as little as 0.5%, resulting in a 60% saving to the electricity consumer, by increasing its debt. But instead, the UK government is guaranteeing a 11% return, which is about 3 times the average return which hedge-funds have managed over the last 5 years.

So economically it is nonsense. And these amateurs in the government are in charge of the UK economy.

But the political and economic dependency for one of our most strategic energy sources, electricity, to China is even worse.

This week the American magazine Harper has a lengthy article, The new China Syndrome, on how American corporates are in being bumped around by the totalitarian regime in China. It makes interesting reading in its entirety, but here are some highlights:

Here is how China dealt with Rio Tinto executives:

When American corporations succeed in China, the result is not a mutual sense of comfort and familiarity, such as Toyota now enjoys in the United States. Instead we see a tightening of control, and increasing efforts to bend these powerful commercial institutions to the will of the men who run the Chinese state.

Rio Tinto, the world’s number-two supplier of iron, was among the first targets of this approach. In 2010, global prices for metals were spiking, and China’s state-owned steel mills pressed the corporation for a discount rate on iron ore. Rio Tinto refused — and meanwhile began selling ore to a few privately owned mills in the country. In response, Beijing simply charged four executives in the company’s Shanghai office, including an Australian citizen, with capital crimes. The tactic seems to have worked. While the four sat petrified in a Shanghai courthouse that March, Rio Tinto CEO Tom Albanese was in Beijing to, as one journalist put it, pay “homage to China’s leaders.” A couple of weeks later, a deal was struck on the pricing of iron ore.

Or here, when a dispute with Walmart erupted:

Another early target was Walmart. In October 2011, authorities in Chongqing charged the corporation, which at that time controlled some 10 percent of China’s hypermarket sales, with mislabeling pork products. Let’s recall that Walmart was (and is) the world’s largest company in terms of revenue. This didn’t discourage the Chinese from jailing two of Walmart’s employees, putting seven more under house arrest, and closing all of its outlets in Chongqing for two weeks.

Here some actions against Glencore, InterDigital and Qualcomm:

Some observers believe that Chinese authorities target foreign corporations merely for mercenary ends. Their goal, this thinking holds, is to grab patents for Chinese companies, or to shake a little cash into national or personal coffers. These quiet aggressions often do result in measurable commercial advances. Beijing held up Glencore’s takeover of Xstrata, an Anglo-Swiss mining operation, until executives agreed to transfer control of a lucrative Peruvian copper mine to a Chinese company. A lawsuit against InterDigital, which manages a vast portfolio of wireless patents, led that corporation to grant special treatment to Chinese enterprises. Litigation against the chipmaker Qualcomm had a similar effect, and in that instance Beijing tacked on a $975 million fine.

How about some “Maoist practices” against GSK, GE, IBM, Intel, Microsoft, Siemens, and Samsung?

Last year, Beijing used anticorruption statutes to fine the pharmaceutical company GlaxoSmithKline nearly $500 million. The year before, the tool of choice was a new antimonopoly law, which Beijing wielded during a sort of mass shaming of foreign executives. Functionaries from the National Development and Reform Commission reportedly summoned in-house lawyers from some thirty companies, including GE, IBM, Intel, Microsoft, Siemens, and Samsung.

Once everyone was in the room, officials announced that half the companies present were already under investigation for monopoly crimes — but didn’t say which. According to the Reuters journalist who broke the story, the officials instructed the managers to write down public “self-criticisms,” a Maoist practice designed to coerce individuals into confessing wrongdoing in advance of any trial. A Chinese regulator made the consequences clear: if any company resisted, he might double or triple its fine.

So why the large corporations do it? The reasons are self-evident:

First is the fact that so many U.S. companies now depend on China for the products they sell.

and then

A second reason corporations are so willing to accede to Chinese diktats is the allure of Chinese markets.

So what happens if you do not comply? Here Google and the New York Times:

A handful of U.S. companies have avoided exposing themselves to Chinese control, sometimes at great cost. In March 2010, in response to growing censorship and a surprisingly sophisticated hack, Google redirected Chinese- and English-language searches from the mainland to servers in Hong Kong. Beijing responded by temporarily cutting off access to Google’s search engine and, more recently, to Gmail. The cost to Google? Access to the world’s largest market of Web users, 649 million strong and growing.

The story is much the same with the New York Times. In October 2012, the paper published an article detailing how the family of former premier Wen Jiabao had accumulated more than $2 billion in assets by taking advantage of the “intersection of government and business.” Chinese authorities responded by blocking domestic access to the paper’s Chinese-language website and refused to provide visas to its reporters. Despite being cut off from millions of potential readers and seeing a key bureau hobbled, the Times has not budged.

What about the usual suspects, the big investment banks, what do they do?

What we must now get our heads around is that Morgan Stanley and Goldman Sachs, though based in New York, are not all that different a case. These bankers have for years profited by serving as procurers for Chinese investors who long to get their hands on American technologies and other assets. Their real interest nowadays? To subject their companies even more directly to Chinese influence by, as Morgan Stanley bluntly put it, hiring the “sons and daughters” of China’s sitting rulers.

Now, you might argue with the next paragraph. Should corporations have the ability to regulate trade rules, (as they seem to do with TPP rules which is entirely written by corporate lobbyists, in my view) or should the government have more power to represent consumers, rather than corporations?

In the run-up to last summer’s vote on fast-track negotiating authority for the TPP, President Obama warned that what is now at stake is who gets to “write the rules for trade in the twenty-first century.” What America’s political class and security establishment have yet to realize is that in a world in which nations are intertwined by global corporations, there is something else at stake: who gets to write the rules for liberty here in America. The difference between traditional American hegemony and Chinese hegemony cannot be overstated. When the United States wielded power over corporations in the postwar era, our overarching goal was — with some notable exceptions — stability, peace, and prosperity. When China wields its power over foreign corporations, the ultimate goal is — always — command and control.

What does that mean in the long term?

It is impossible to tell how China will pull these strings. Perhaps one day soon Beijing will threaten to cut off basic supplies of drugs and electronics, in an attempt to sweep our ships and troops from the Pacific. (To understand this ploy, Chinese leaders would need only study the actions of President Eisenhower in 1956, when he drove the armies of Britain and France from the Suez by threatening to cut off supplies of money and oil.) The more likely scenario, however, is less dramatic. Given America’s almost moribund federal authority over trade, China is largely free to manipulate the greed and cowardice of our corporate leaders, in ways that every day concentrate more control in their own hands. The national interest? Only a cacophony of interests manipulated from afar, like France in the days just before Vichy.

Where the brilliant Harper’s analysis is completely wrong, though, is here. At least as far as the UK is concerned:

Is there any hope of reversing this sorry trend? Of course — if we move immediately to put country above company, and to restore the systems of checks and balances we used for two centuries to distribute power safely at home and abroad. But to do so, we must first understand that Beijing, however terrifying, is not our immediate enemy. To regain our liberty, we must first target the oligarchs in our midst. In tearing down the fences to gain more absolute liberty for themselves, it was they who let in the wolf.

Now, what we have just seen in the UK, with the signing of the Hinkley Point C nuclear power station contract, is that the UK has not put our country above the (in this case foreign state-owned) companies with whom we made the deal. Our checks and balances, which would normally ensure that we have vaguely competent politicians have failed. There is a case to be made for nuclear power, and for new investment. But not with the current contract.

However, in this case there were no oligarchs responsible that the deal was signed, and signed in such a way which would make it extortionately expensive for the taxpayer. If it costs only £670 million to repay a capital loan and run a power station a year, (as we have calculated before) and perhaps another £100 million to maintain the power station each year, why are we paying £2,000 million per year? We are paying three times the current rate?

George Osborne laughing

Not funny: Clueless George Osborne                                    Photo: politicalscrapbook.net

Can nobody add up in the government, or use a mortgage calculator?

So clearly no oligarchs to target here, in this particular instance, only incompetent politicians in the Tory party, which sign us up to a deal with China. Chinese authorities who have a national interest at heart, and will, as the quotes above show, use their power to get their way. The risk is that they will do so with the UK, too.

In the UK the Chinese have found an easy target, a completely clueless chancellor. A country which had one of the highest current account deficits (trade deficit) in the world last year, the UK, will give income away to the Chinese (and French) which will make the current account balance much worse in future. Guaranteed. All because the Tory government are deficit fetishists, which must come above all else in the UK’s policy considerations.

Labour should continue to fight this Hinkley Point C policy, which could, if rigorously attacked, become the poll tax moment for the Conservatives. More so than the Tax Credit disaster. And a test case on how public finance is more prudent than these huge PFI contracts as Hinkley Point C, tying the UK to ruthless autocratic regimes to which the UK is obligated to pay extortionate sums in the future.

Kow-towing: politically risky and economically stupid

Today the UK government will sign declarations with the Chinese, asking them to build and finance our nuclear power stations, high-speed railway lines and other infrastructure. These are potential investments of up to £100 billion. The cost: we will have to become “best friends” with a totalitarian regime. A regime which only a few years ago froze us out completely for a couple of years, because David Cameron had the temerity to meet with the Dalai Lama, the leader of China occupied Tibet.

The aim of foreign policy is to stand up for our national interest.This kow-towing, also known as the Osborne doctrine is nothing of the sort.  We are having a country build our strategic electricity supplies, which a few years ago would not even speak to us? Have we gone completely bonkers?

Political risks

The political risk is the inability to take a stance against China, which is aggressively pursuing its military dominance in South East Asia, for example. This is clearly against the interest of the UK’s main ally, the USA.  We are restricting our ability to criticise China from now on, as the Chinese might turn around and stop building our power station, or stop it from running, once it is installed.

I will come back to the political risks in another post, but first let us try to make an economic case, and the alternatives.

The case for engineering expertise

Despite of the political risks, that is not to say that Chinese expertise and know-how in building nuclear power stations is not welcome. Chinese engineers, who built 28 plants in China in the 30 years in which the UK ran down its old plants, will the be world experts. Their help is needed, if the UK is to build its own nuclear power station.

The case against Chinese financial involvement

But to ask them to finance and build power stations by themselves here in the UK is really mad. Allegedly, the Chinese have a lot of money to finance our infrastructure. “A jolly huge amount of money”, as John Humphries of Radio 4’s Today programme said yesterday. I beg your pardon?

Do they? The Chinese are on average as wealthy as the Romanians. Their GDP per head is about the same. We would never think of Romania giving us the finance to build our infrastructure, but for the Chinese it is not supposed to be a problem? This is simply nonsense. But comments like this pass nowadays as thorough analysis in our broadcasting studios.

One thing is true, though. The Chinese run a current account surplus with the rest of the world, as they are exporting more than they are importing. So, yes, they have foreign currency earnings with which they might want to buy foreign assets. Traditionally they bought $ denominated government bonds. But increasingly the Chinese are looking to buy real assets, for example in Africa, in real estate, or in strategic industries.

But Germany has a current account surplus which is much larger (as a percentage of GDP) than the Chinese. Yet, the Germans are not queuing up to invest in UK infrastructure. So what is the obsession with the Chinese?

The financial costs of the £25bn Hinkley C nuclear power project

All these political considerations should perhaps not really be a problem, if we obtain cheap electricity through the contract, if everything “works out” politically. In other words, let us not worry too much about it, let us hope for the best, and enjoy the cheap electricity. Hinkley C is the first such nuclear power venture.

Currently the cost of the Hinkley C project to the electricity consumer is around £2bn a year, based on the agreed electricity buying price (twice the current market price) and the estimated amount of electricity for the Hinkley C power station. Hinkley C which will be 1/3 owned by the Chinese, with a further 2/3 being owned by the French state owned power companies.

Please look up any mortgage calculator, and try to estimate for yourself how much it would cost the UK if we were to build it ourselves and borrowed £25bn on a repayment basis over 35 years. Let us say the UK commissioned and ran, as the project manager, the building of Hinkley C, which would be delivered as a turn-key project.

Option 1: The UK asks the builders to build the nuclear plant, buys it for £25bn, and borrows for 35 years at 2.5%

Annual repayments over 35 years: £1,070 milion per year

Option 2: Same as Option 1 but government borrows at cheapest short term interest rate (currently 0.5%)

Annual repayments over 35 years: £780 million per year.

(Rationale for short-term borrowing: Although it is a 35 year project, it is sensible for the UK to issue cheaper short term debt, which it can always roll over. There is a risk that interest rates will rise, but they will only do so if there is inflation, which will reduce the real value of the debt. Short-term borrowing and roll-overs are therefore the most sensible way to finance ANY government borrowing. This would protect the project against deflation risks, too)

In addition to Option 1 and Option 2, the UK would have the cost of running Hinkley C (employees wages, mainly) which would add perhaps £10 million to the annual cost, (1,000 employees at £100,000 per year) plus the cost of the uranium fuel (£5 per MWh) (another £100 million per year). Plus the cost of plant maintenance.

Option 3:

In comparison, the all-in cost of Hinkley C is estimated to be about £2bn a year, based on a contract to buy electricity at £92.50 per MWh (2011 prices plus inflation) for the next 35 years. This is the contract currently on the table which will be signed.

So we have a cost of Hinkley C of either:

Option 1: £1,180 million per year (1,070m capital borrowing cost, 10m labour, 100m fuel)

Option 2: £890 million per year (780m capital borrowing cost, 10m labour, 100m fuel)

Option 3: £2,000 million per year (all in cost)

Not surprisingly, because the UK does not want to borrow £25bn construction cost, it will pay instead about twice the amount of money for its electricity at Hinkley C. The only option on the table is currently Option 3.

Going for Option 1 would result in a 40% saving, going for Option 2 would result in a 55% saving. (Although plant maintenance costs are not included in Options 1 and 2.)

Sadly,  Options 1 and 2 are not even being discussed.

Summary

Hinkley C is the most expensive power station ever being constructed anywhere in the world.

The UK could borrow the money cheaply, but will not, as that would increase the deficit.

The fact that it will be financed by the French/Chinese, who are guaranteed 11% return on equity, will make it extremely expensive.

The UK will become politically dependent on the Chinese, with whom, following the Osborne doctrine, it will have to stay “best friends” to ensure the UK’s strategically important electricity supply will be built.

The UK will become dependent on China during the time the nuclear power station will be run.

The Labour opposition, as well as the National Infrastructure Commission, and the National Audit Office should ask for a review of the Hinkley C contract. The aim should be to ask for contract amendments to ensure the public reduces its political risks of being dependent on the Chinese, and, just as importantly, the costs of Hinkley C are reduced.

UPDATE-UPDATE-UPDATE-UPDATE-UPDATE

News update following press conference on 21st October in afternoon:

The figures I have used, the cost of Hinkley C at £25bn (a figure in the news over the last weeks) has, now, that the deal has been signed, updated to £18bn. Here is the BBC news report.

“The mainly state-owned EDF said the final cost would be £18bn. State-owned CGN will pay £6bn for one third of it.”

That is surprising, a project which comes down in price by about 1/3? We never have had that before!

Now, what does that mean for the calculations above, £18bn, instead of £25bn?

It will make the figures:

Option 1: £880 million per year (770m capital borrowing cost, 10m labour, 100m fuel)

Option 2: £670 million per year (560m capital borrowing cost, 10m labour, 100m fuel)

Option 3: £2,000 million per year (all in cost)

So basically, if previously the British public was just being ripped off badly, the new costs  of only £18bn now make this deal absolutely ridiculous. The British public is “taken to the cleaners”. We could, had we financed Hinkley C by ourselves, through deficit financing, have had the electricity produce by Hinkley for about 1/3 of the cost what it will cost us now.

I am sure “taken to the cleaners” will be an idiom the Chinese will be keen to learn and repeat in future. Osborne should resign, of course.

Karl Marx, Henry George and China

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About 150 years ago, Karl Marx and Henry George wrote books which they would hope would greatly influence economics, and ultimately, the history of the world. Now if you had been a betting man at the end of the 19th century, who would you have thought, would have the most influence on world affairs?

The main work of Karl Marx, Capital, was over 1,100 pages long and not very popular. Volume I , only sold 1,000 copies in a five year time-frame after its first publication in 1867. Marx would die 16 years later in 1883. “There were between 9 and 11 mourners at his funeral”. That is what it says in Wikipedia.

In contrast the work of the other author, Henry George, was a real best seller. It was published in 1879. Over 3 million copies of Progress and Poverty were sold in a very short time, and at almost 600 pages it was not a very easy read either, but a lot more digestible than Capital. In fact, after the Bible, Progress and Poverty out-sold all other English language books in the 1890s.

(These sales figures, if right, are pretty impressive, Capital in the 21st Century by Thomas Piketty has only sold 1.5 million copies so far.)

In 1897, fourteen years after Karl Marx’s death, Henry George died. He had tried to run for mayor of New York in that year, but suffered a stroke 4 days before the election. Wikipedia again:

An estimated 100,000 people visited Grand Central Palace during the day to see Henry George’s face, with countless more crowding outside, unable to enter, and held back by police. …

2,000 people accompanied his funeral procession:

The New York Times wrote, “Rarely has such an enormous crowd turned out in Brooklyn on any occasion,” but that nonetheless, “[t]he slow tolling of the City Hall bell and the regular beating of drums were the only sounds the broke the stillness. . . . Anything more impressive . . . could not be imagined.”

As a betting man, you might have thought the more popular book’s ideas by the more popular man would eventually be taken on and shape history. Progress and Poverty made the case for the taxation of land, which was seen by Henry George as the provider of all the resources from which eventually profits could be drawn. It was radical, especially as that tax would be the main source of all government revenue, making all other taxes less important or unnecessary. It would tax wealth, rather than productive capacity of capital and labour. But it was a lot less radical than Capital by Marx, which argued for land and all other means of production to be socialised and brought into public ownership, a main plank in his Communist Manifesto.

From 1917 onwards, with the Russian revolution, it was of course Marx’s view which was the more dominant, and land and factories were indeed expropriated and became part of the state, as he did suggest in his writings. Marx’s statues would stand for decades in communist countries, cities would be named after him. His books, published mainly with the help of Marx’s millionaire friend Friedrich Engels, running into thousands of pages, were studied in minute detail by students in Eastern Europe. But Marx’s ideas were of course influential in the West. When taking a Company Law course at university, I myself learned something about the Propensity of the Rate of Profits to Fall, which the left leaning lecturers thought necessary to include, inter alia, in the syllabus of the law course.

But I had never heard of Henry George, until a few years ago, although his thinking was very influential in the earlier part of the 20th century, when a Land Value Tax law was already part of the UK statue book, only to be repealed by Conservative Prime Minister Chamberlain. Of course, WW2 followed, Land Value Tax has not really been debated since, although the Labour party could well resurrect the idea, which the Green Party has already adopted.

So popular ideas do not necessarily shape history. Karl Marx’ ideas won and Henry George disappeared into relative obscurity.

Arguably, for the mainly feudal societies of Russia and China, the Georgian Land Value Tax would have been a more appropriate tool to empower the proletariat and peasants, rather than the forced colletivisation of agriculture, which in both the Soviet Union and China led to cruel deaths through hunger. And industry would have arguably been better served by entrepreneurship, rather than central planning. But that was never on offer, it was the revolutionary ideas of Marx which were more popular in revolutionary Russia, which in the end won out.

So the Soviet Union and the China were for a very long time the main communist countries, and Marx provided much of the intellectual justification for their communist states. China still is, surprisingly, communist. Whereas long leases of property (such as apartments and factories) are available, the ultimate owner of the land is still the state. Russia has, of course, after 1990 been “privatised”, and the money made from that by individuals now provides finance for UK football clubs, universities, the Conservative Party, and the up-market housing market in London, all of which are supported by Russian oligarchs.

As far as China and Marx is concerned, last week Naked Capitalism published a very good analysis, a lecture given to the School of Marxism, at Beijing University by Michael Hudson. It is worth a read and it picks up on the relationship between Karl Marx Capital Volume I, II and III; and Henry George.

China has largely solved the “Volume I” problem – that of expanding its internal market for labor, investing the economic surplus in capital formation and rising living standards. It is confronted by Western economies that have failed to solve this problem, and also have failed to solve the “Volumes II and III” problem: finance and land rent. Yet few Western Marxists have applied his theories to the present downturn and its rentier problem. Following Marx, they view the task of solving this problem to be solved by industrial capitalism, starting with the bourgeois revolutions of 1848.

Already in 1847, Marx’s Poverty of Philosophy described the hatred that capitalists felt for landlords, whose hereditary rents siphoned off income to an idle class. Upon being sent copies of Henry George’s Progress and Poverty a generation later, in 1881, he wrote to John Swinton that taxing land rent was “a last attempt to save the capitalist regime.” He dismissed the book as falling under his 1847 critique of Proudhon: “We understand such economists as Mill, Cherbuliez, Hilditch and others demanding that rent should be handed over to the state to serve in place of taxes. That is a frank expression of the hatred the industrial capitalist bears towards the landed proprietor, who seems to him a useless thing, an excrescence upon the general body of bourgeois production.”

As the program of industrial capital, the land tax movement stopped short of advocating labor’s rights and living standards. Marx criticized Proudhon and other critics of landlords by saying that once you get rid of rent (and usurious interest by banks), you will still have the problem of industrialists exploiting wage labor and trying to minimize their wages, drying up the market for the goods they produce. This is to be the “final” economic problem to be solved – presumably long after industrial capitalism has solved the rent and interest problems.

Hudson goes onto say and finishes his lecture:

China has solved the “Volume I” problem. But it still must deal with the West’s unsolved “Volume II and III” problem of privatized finance, land rent and natural resource rent. Western economies seek to extend these neoliberal practices to use finance as a lever to pry away the economic surplus, to finance the transfer of property at interest, and to turn profits, rent, wages and other income into interest.

The failure to socialize banking (or even to complete its industrialization) has become the most glaring economic tragedy of Western industrial capitalism. It became the tragedy of post-Soviet Russia after 1991, letting its natural resources and industrial economy be financialized while failing to tax land and natural resource rent. The commanding heights were sold to domestic oligarchs and Western investors buying on credit with their own banks or in association with Western banks. This bank credit was simply created on computer keyboards. Such credit creation should be a public utility, but it has broken free from public regulation in the West. That credit is now reaching out to China and the post-Soviet economies as a means of appropriating their resources.

The eurozone seems incapable of saving itself from debt deflation, and the United States and Britain likewise are limping along as they de-industrialize. That is what leads them to hope that perhaps socialist China can save them – as long as it remains free of the financial disease. asset stripping and debt deflation. Western neoliberal economists claim that this financialization of erstwhile industrial capitalism is “progress,” and even the end of history. Yet having watched China grow while their economies have remained stagnant since 2008 (except for the One Percent), their hope is that socialist China’s market can save their financialized economies driven too deeply into debt to recover on their own.

Michael Hudson, is, of course right.

Now, on the day China’s President starts his state visit to the UK, it is indeed rather ironic that we are not only to a large extent turning to China to save our “financialized economies”, but also our electricity crisis, by asking them to build nuclear power stations..

In fact, it is worse than that, our “financialized economy” in the UK seems to be unable to provide finance to the build Hinkley C power station, unless the UK gives state indemnities to the finance providers.

So we have no engineers with expertise to build a nuclear power station by ourselves, we have no government which wants to borrow at preferential financial rates, we have no private finance sector which is willing to shoulder the risk, and no commercial construction company capable of such projects by themselves.

So we are turning to a country which has 1/5th of the UK’s GDP per person, China, to do all this for us, borrow the money for us, and build the power stations.

In turn we are offering China the chance to intensify trading its currency in London or to co-operate with the Shanghai stock exchange, as if that was a remedy for our inability to provide our energy ourselves. And as if China was vaguely interested in that stuff.

If anybody needed any further proof that this current Consevative Government only follows the thinking of the finance sector, that is surely it. We are entangling ourselves in an expensive project (Hinkley C) which could be a quarter cheaper (if government financed) or indeed be completely free (if PQE financed). But these options are not discussed.

We are getting further into debt, with Hinkley C being the most expensive PFI contract ever, twice as expensive as the one which delivered scores of new or refurbished hospitals under the PFI initiative from Labour. Jounalists were surely talking the Micky when they called this running to the Chinese with our begging bowl the “Osborne doctrine” this morning on Radio 4. There is a case to be made for a nuclear power station, but the financing of it under the “Osborne doctrine” should be subject to immediate scrutiny by Labour as the opposition party, and the National Audit Office. Labour and the NAO should state whether the proposed financing is adequate, or if any other financing options would indeed provide better value for money.

Both Karl Marx and Henry George would be flabbergasted. What President Xi might think of the competence of British government politicians, who act as if puppets to the private finance sector, rather than looking after the interest of their people would be interesting.

China is at a juncture, is it to follow the West’s capitalist model, with its over-dependence on finance, as Michael Hudson seems to fear, or will it concentrate on improving the wealth of all its citizens? Hopefully the Chinese will see sense, and continue to put finance into second place, well behind real infrastructure projects such as railways and power stations.

If it ignores finance, and keep it largely state-owned, China will be able to afford to build more of its own power-stations and high-speed railway lines without going with a begging bowl to another country. The highly financialised economy of the UK cannot. Despite being 5 times richer.

It is the UK which should put finance in its proper place, and use it to serve all of us, rather than just the privileged few and the Conservative Party. Time for a change. Roll on 2020.