Original URL: http://www.theregister.co.uk/2008/07/25/green_new_deal/

The FDRs of Green explain the gentle art of planet saving

Flunking economics the Green New Deal Group way

By Tim Worstall

Posted in Science, 25th July 2008 11:02 GMT

A "triple crunch" of financial crisis, climate change and soaring oil prices threatens the world with a new Great Depression so, 'drawing inspiration from FDR' the Green New Deal Group proposes "a modernised version" of the solution. FDR himself being unhappily unavailable, we have the newly-formed group and its eponymous report instead. And frankly, it goes downhill from there.

The group, which describes itself as a collection of "experts in finance, energy and the environment" consists of various greens and lefties, Friends of the Earth, Green Party, Guardian journos and the like. And it arguably falls at the first hurdle by taking as fact three highly debatable points: that we face a financial crunch, a climate change one and an energy crunch. For a cloud of doubt hangs over the crunchiness of all three.

Take that financial crunch: they say that the current wave of bankruptcies across the financial sector is all the fault of the liberalisation and deregulation of finance over the past few decades. They're actually right that it is, but the system is working just as advertised. Risks are indeed being spread: when German banks go bust because American house prices are falling, this is evidence that the risks of US house price declines have been spread to German banks. Quite why they think this is a bad idea isn't explained. Would it have been better if all banks in Florida had gone bust because the risk was concentrated there instead?

That there are financial problems, of course, yes, there are, but this is just one of the overshoots to which market based systems are prone.

The 500 year climate crunch

Similarly, we don't face a climate change crunch: we have a chronic problem, not one that is either immediate or catastrophic. It's extremely difficult to claim that Greenland melting in 2,500 AD is an immediate problem. As to the energy crunch and Peak Oil, well, markets themselves seem to be dealing with that rather well: oil at $130 a barrel will certainly reduce appetites for it, and if it becomes in yet shorter supply then prices will rise again and appetites will be further curbed. So too will other forms of energy generation flourish in the space now vacated.

But that is all being reasonable and rational - which really isn't what this report is about. What it is about is their desire to impose their version of how you should live upon you, regardless of your own wishes. Cheeringly though the report is based on such a concatenation of false arguments and at times willful stupidity that there's (well, at least I hope so) no chance of anyone taking it with the slightest bit of seriousness.

To give one example, they say this about interest rates:

Meanwhile privately fixed interest rates, set by the British Bankers Association and known as LIBOR, have continued to rise – in defiance of the official rates set by central banks. This is the clearest evidence of central banks and governments losing control over a key lever of the economy: the power to set the rate of interest.

Umm, no central bank or government has ever been able to set long term interest rates. Even those that have tried have failed: for all that they've ever had is the power to influence short term rates through variations in the Bank Rate, the rate at which the central bank or the government will lend to the commercial banks. What then happens out there in the markets is influenced by this, certainly, but not controlled. Long terms rates can be (and have been) lower than short term, higher, much higher and the same: it all depends upon what everyone else thinks inflation (amongst other things) is likely to be in the future. That opinion, as you might note, is not always the same as the government's own thoughts on the subject, as Zimbabwe is showing us with great clarity.

As an almost trivial addition to this, LIBOR is not in fact "set" by the BBA. It's calculated and disseminated by them, certainly, but it is set by the markets themselves by looking at the rates at which banks are actually lending to each other. Their position is rather like stating that BP trades at £5.36 a share because the Guardian says so, rather than The Guardian telling us that everyone else thinks that, by their actions in buying and selling, BP is worth £5.36 a share. Interesting to note that one member of this group is in fact Larry Elliot, the Economics Editor of the Guardian, which is probably all you need to know about the value of the economics pages of the Guardian.

Siege economics revisited

Their analysis leads them on to propose three things for the economy: capital controls, credit controls and low interest rates. Credit controls sound rather benign really - we'll stop people wasting their money by buying houses say, and channel it all to industry instead. Well, yes, welcome back to the world of queuing at the Building Society for a year or two to try and get a mortgage: they seem to have forgotten (as if they ever knew) that the most efficient method of rationing something is price. Capital controls have to be there to stop everyone fleeing such a system (did you know that in 1979, before the last set of such was lifted, you had to have government permission to take more than £25 out of the country? Really, you did: about £76 in today's money and try a holiday on that these days).

Low interest rates are so that:

"Low interest rates mean that investments become significantly more affordable... The impact of low interest rates is therefore very clearly seen. They are vital if viable green alternatives are to be made available. Put simply, they make it possible to secure investment into new sources of energy, the jobs that create those resources and the future of our planet. Without them all these things may be in doubt."

They seem entirely blind to the concept of opportunity costs. It's true that an investment that yields 4 per cent when interest rates are 2 per cent seems profitable and when interest rates are 5 per cent it appears not. But that isn't the way that we do or should allocate capital. Whatever the level of interest rates, we want to do the most profitable things first: those that yield 15 per cent or 20 per cent, say. Only when we've exhausted those opportunities should we do those things which have lower returns. If we get suckered into doing those 4 per cent things before we've done the higher value ones then no, we don't turn a profit just because interest rates are low: we've lost those profits which we could have had. Changing the level of interest rates does nothing at all to change the fact that low returns are low returns and high are high.

One exquisitely revealing sentence is this: "Capital controls will preserve domestic savings for domestic use."

They seem rather to have missed the point that the savings belong to individuals, to use as they wish, rather than to the nation to be used as the nation insists. At the risk of someone screaming "Godwin's" at me, they're not just socialists they're nationalists as well. You and yours will be put to the service of the nation (as they define "use" and "nation" of course) rather than as you desire.

Let's choke off overseas investment!

One final point on their economic analysis. The aim of all of this is that huge amounts of savings will be created which can then be deployed to create the green energy infrastructure that they deem is necessary. So, they're going to impose capital controls: anyone know whether we export or import capital at the moment? Yes? You at the back? Good, you've noted that we've been running a trade deficit for the last however many years it is. You're also aware that the balance of payments must indeed balance... so that if we have a trade deficit then we must have a capital surplus. So we have been importing capital for the last however many years it is then, yes? Good, you now know more about this part of economics that the above mentioned Guardianista, the former head of Greenpeace International's economics unit, two former Directors of Friends of the Earth and the Policy Director of the New Economics Foundation. For those worthies (no one expected Caroline Lucas to understand this sort of stuff anyway) all seem to think that if we have capital controls then, by Johnny Foreigner not sending us any more capital, we'll somehow have more capital to invest in the UK.

Further, they think that if you lower interest rates, thus lowering the amount that people earn from their savings, that people will save more, again creating that lovely pot of money to be splurged on their pet projects.

The rest of the report varies from the similarly illogical to the amusingly insane: Cuban agriculture for example is held up as something to emulate. While it's entirely possible to grow cabbages in Hyde Park and indeed we've done it in time of need, doing so is a reflection of staggering poverty, not actually a course of action we would follow by choice. Comparing the ability of a Caribbean island to grow its own vegetables with that of a cold rainy island off NW Europe also seems to ignore the necessarily turnip-based diet that would result for some months of each winter. They're still deep in the grip of the delusion that the creation of jobs is a benefit of such schemes rather than a cost. They want a windfall tax on the oil and gas companies (as the Guardian reported, the last one actually reduced the amount of exploration going on).

And on it goes. "Drawing our inspiration from Franklin D. Roosevelt's courageous programme launched in the wake of the Great Crash of 1929, we believe that a positive course of action can pull the world back from economic and environmental meltdown," they tell us. Trouble is if it's this positive course of action, we're all doomed. ®

Tim Worstall knows more about rare metals than most might think wise, and writes for himself at timworstall.com, and for The Business, among others. He is a Fellow of the Adam Smith Institute.