Archive for June, 2009

The current financial crisis raises fundamental questions about the alleged merits of globalization. Britain’s current plight illustrates this strikingly.

Britain’s long, much-praised boom was based upon our much-vaunted competitive advantage in service industries, above all in the financial sector. It did not matter, it was said, that we had small manufacturing sector and imported most everyday consumer goods, because our high-level expertise gave us the wealth to buy these things from economies that could produce them at much lower cost.

As a result of the financial crisis, major financial institutions have become insolvent or at risk of collapse and public funds have been required in order to stabilise the system. Britain’s premier service industry can no longer claim to be the robust front-runner of the economy it once did. Furthermore, the feted expertise and creative panache of investment bankers looks less convincing than it did. Much of the boom, it has emerged, was based upon high-risk investments and elaborate stock-value gambles whose yields eventually began extensively to fall short of expectations. A more prudent and old-fashioned investment model now looks cleverer than the proceedings of recent times.

This leaves Britain’s service sector economy with its leading sector badly weakened in economic power and prestige, with its strident demands for minimal regulation refuted by events and the widely –accepted need for pro-active government intervention.

This leaves the rest of Britain’s economy-leading service sector and the country’s wider prospects on the global stage planted on a fast-shifting sandbank. At the root of this lie the sharp contrasts between the nature of the jobs in the upper echelons of the service sector and that of the vast bulk of service jobs done by millions of British workers.

In most service jobs, the service provided by the worker involves merely facilitating use by the customer of a piece of advanced technology. The passenger pays for the temporary use of a railway, consisting of a large set of manufactured goods. The train drivers and station staff merely facilitate this. The customer phones up for information processed on a large corporate computer built from solid hardware and tangible software expertise, while the call-centre worker does little more than read the information out. When a shopper goes to buy the latest sophisticated gadget the shop assistant’s role is largely confined to processing the purchase. It is only at the very top end of the service industry, such as in the law, medicine or accountancy, that it is predominantly the skill of the individual service provider that one is paying for.

In the greater part of the service sector, the service worker contributes only a small proportion of the value of the service provided. It is above all the technology that they provide access to that holds the predominant value in the transaction.

The low level of value added by the rank and file service sector worker is reflected in the fact that the wages for the majority of British workers are punitively low in relation to the cost of living . In addition, the gap between these incomes and the well-off is very great.

These factors lend firm support to the view that an economy simply cannot generate enough wealth to ensure a robust level of income for most without making real concrete objects that offer substantial added value to the purchaser.

But what, exactly, should Britain manufacture? For one thing, what it most certainly and with urgency ought to be doing is embarking upon the large-scale making and installation of off-shore wind turbines. Britain has the greatest wind resources in Europe, and is surrounded by shallow seas well suited to this.

It is unlikely, however, that this would be enough to turn Britain into a high value-added economy. Moreover, China and the other export-led developing economies have already gone beyond simpler mass-produced items and before long are likely to rival British capabilities in renewables at prices which, because of our labour costs, we cannot match.

Many of our European partners have avoided going nearly so far down this road towards a labour force made up of a high-earning minority and a majority on stagnant earnings in low value-added occupations. They have done so by maintaining a robust manufacturing, exporting sector.

However, the inexorable logic of competition from the developing economies is that free trade will enable them to make increasing inroads into most spheres in western Europe that produce the high value-added real objects of manufacturing and software design. If they do so, these economies will become hollowed out as those sectors shrink, a process which Britain has followed furthest.

Eventually, it must become clear to policy makers that maintaining our wealth depends upon maintaining our capacity to make real objects that people need and want to buy. At that point, it is likely that there will emerge a mounting tide of calls for targeted tariffs to protect the most valuable industries. This would run counter to EU economic orthodoxy, but this is an orthodoxy that could well be overturned.

Housing is not like anything else in economics. It is governed by different economic rules than apply elsewhere. That, at least, is the conclusion to be drawn from what economic commentators and politicians say about it. With other things, it is good when they become less expensive. In housing, it is good when prices go up. But this makes less sense when you start to ask why it is so.

The latest high-tech multi-function gadget will be launched at a price that trend-setters alone will pay, but before long it or its imitators become more accessible, the price plunging both in face value and in real terms. Many commonplace items also become cheaper over time. Few disagree that this tendency is a good thing – except when it comes to housing.

The Halifax has reported that house prices have fallen by 15 per cent in the year to October.[1] Commentators nearly universally take this as major bad news for the economy. It is admitted in passing that first time buyers could benefit from this, but that said to be outweighed by wider considerations.

Of course, reasons why housing is an exception can readily be given. It is a piece of solid wealth standing against future uncertainties. Maintaining a mortgage enables people to stabilise the overall size of their outgoings for living accommodation. It is important to do this because, as a general trend over the medium and long term, the cost of homes keeps going up.

This is key to the economics of housing. Property values tend to rise, but the reason they tend to rise is that there is a scarcity of housing. Some 100,000 households are officially accepted by local authorities as homeless each year.[2]  In 2007 only 160,000 new homes were built in England, whereas the government’s target is for 223,000 per year.[3]

Stagnation rather then on-going price falls arises from the current finance shortage because sellers must escape negative equity caused by over-priced housing, in turn caused by the shortage of supply.

A vibrant housing market, reflected in rising prices, is also said to be good for the economy because it generates spending on furnishings, plumbers and carpenters. This would also take place, however, if house sales were buoyant due to an on-going fall in the real-terms price of housing, which would happen if there were not a scarcity of it.

It is, in fact, a completely unnecessary scarcity. If a modern advanced economy like Britain’s can readily supply the range of material goods that a modern way of life requires, from shelter and food to high-tech gadgets, then it is hard to see why it cannot supply enough of something so comparatively pre-modern and low-tech as a decent home to live in.

Key to getting out of the housing tangle is to build a lot more of it.

Acquiring a house or flat to live in, whether purchased or rented, will inevitably be a major economic transaction for most people. But there is no reason why it need be such a large transaction that it distorts the whole pattern of a person’s decisions about where they live and how they earn a living. If housing were not scarce it would be much cheaper and become more so as time went on. It would be just one among other major purchases that we need to make. It would be easier to change jobs or to embark upon a new form of work. Our wealth would then lie in the wealth of possibilities offered by more flexible patterns of life.

It is time to drop our illusory view of rising property prices as a talismanic marker of economic health. The government needs to start treating housing as something  which plays such a key strategic role in the economy that, while remaining largely in private hands, it must be overseen by government as a quasi-public service. The government should set about taking out for itself the loans necessary to commission an extensive new house-building programme. These funds it would before long start to recoup as rent or re-sales.

Such strategic government action to lessen the distorting effects of housing on the economy would operate as a fiscal stimulus against the unfolding recession by combating unemployment, in a context where Britain’s brick makers have laid off more than 1200 workers [4] in the current downturn and the major builder Taylor Wimpey has cut 1,900 jobs since the summer.[5]

Housing associations, using government assistance, are already taking the lead. They built 56 per cent more homes in the summer quarter this year than in summer 2007, while private sales collapsed.[6] The market alone cannot bring about affordable decent homes. The scale of the problem, in housing and for the wider economy, demands pro-active government intervention.

[1] http://www.guardian.co.uk/money/2008/nov/07/house-prices-fall
[2] http://www.housing.org.uk/default.aspx?tabid=496
[3] http://www.hbf.co.uk/Fact-Bank-8a256fe
[4] http://www.guardian.co.uk/business/2008/nov/13/construction-recession-brickmakers-hanson
[5] http://www.guardian.co.uk/business/2008/nov/12/recession-taylorwimpey
[6] http://www.guardian.co.uk/business/2008/aug/22/construction.housingmarket

We need nuclear power in order to help reduce our carbon emissions. That is the key motive given for the government’s agreement to the building of new nuclear capacity. This view, however, is based upon highly erroneous judgements about the power-producing capacity of nuclear power.

A recent announcement that it would be optimistic to expect to have on stream a new nuclear power plant by 2017 looks anything but impressive given the scale of the climate change challenges and the need for urgent action. A closer look at the background parameters of the nuclear industry reveals how fundamental the obstacles are.

It would in fact, because of the laws of physics and limited fuel reserves, be impossible for nuclear power to make more than a small contribution to Britain’s or the world’s energy needs. It is possible, however, for it to create immense quantities of long-lived dangerous waste and serious security problems, a big price for a small gain

The maximal potential yield of energy from nuclear power can only be accessed if both thermal and fast-breeder reactors are used. Uranium is mined then expended in thermal reactors which yield plutonium as a by-product. This plutonium can be used in fast-breeder reactors to produce energy while creating yet more plutonium from uranium.

A full exploitation of the potential of fast-breeder reactors would yield, according to generally accepted estimates, approximately 50 times as much energy as could be produced from using only thermal reactors to their full potential. Key to this, however, is the doubling time, the time it takes a fast-breeder reactor to produce as much plutonium as has been loaded into it as fuel. Because of the complexities, estimates for the doubling time are between 20 and 30 years.

The overall size of this timescale is dictated by nuclear physics. The first doubling of energy produced comes after about 30 years, the second after a further 30. Only in stages, over about 1500 years could the capacity of fast-breeder reactors be tapped.

This is why, given that action to combat climate change by reducing carbon emissions must take place now, fast-breeder reactors can play only a minor part in this. Any contribution from nuclear power to the energy strategy will have to be largely confined to the use of thermal reactors.

Consider, then, the potential contribution of the uranium that fuels thermal reactors.

Take a nuclear power station in Britain in the standard size range, one that produces one giga-watt of power and uses fissile uranium enriched to five times the concentration in natural uranium. As it operates it produces both heat and plutonium by nuclear fission of the uranium. The plutonium then contributes through further fission a large proportion – typically some 40 per cent – of the heat output. The energy in the electricity finally generated is at about on third the level of the heat output, due to wastage. The total amount of uranium oxide required includes both the fuel fed into the reactor and that from which the fissile uranium is extracted during enrichment.

The net effect is that the reactor will produce, for every tonne of fuel used, energy as electricity equivalent to the heat obtained from burning 3850 tonnes of oil. Multiplying this figure by the joint OECD and International Atomic Energy Agency estimate for the world’s uranium reserves, a total of 3.11 million tonnes, gives a figure for the amount of energy potentially produceable in thermal nuclear reactors. It comes to about 11.5 million tonnes of oil equivalent.

With this figure the scale of the realistic potential contribution of nuclear power to the world’s energy needs becomes clear. The world’s annual primary energy consumption stands at about 11,000 million tonnes of oil equivalent (m.t.o.e.), of which about 77 per cent comes from fossil fuels. This means that the energy available in the uranium reserves would be enough to replace our fossil fuel usage only for about a year and half.

In practice, it would be necessary, if nuclear power were to be used as much as possible to replace fossil fuels, to deploy it over a longer time-scale than this, since plants would have to be built and its use would only mesh with the electricity infrastructure that the move to renewables for all sectors including road transport will also require. Given that Britain uses some 2.6 per cent of the world’s fossil fuels it would seem fair that it should build a proportionate number of these new power plants. It would be about 32. Britain now has 20 plants, with 10 in operation

At present, nuclear supplies 18 per cent of Britain’s electricity from 10 power stations.  This amounts to just three per cent of energy consumption. On the generous assumption that 20 new plants could be put into operation, to triple power output, we could perhaps get about 10 per cent of our energy from nuclear power. Only by constructing a great many more power stations could Britain get the nuclear proportion significantly higher and even then the overwhelmingly greater contribution would still be coming from renewables and, for some time, from fossil fuels also.

It is often said that nuclear could provide flexibility of power supply and back-up for renewables, given that those are subject to fluctuations in wind and sunlight. However, the government (DTI) paper of May 2007 stresses that nuclear specifically, because of the operational complexities, is not suitable for this.

It is indisputable that nuclear, while causing serious long-lived environmental damage and major security difficulties, remains inescapably a comparatively feeble energy source.