Thursday, 22 August 2013

Reader's Letter Of The Day

From yesterday's FT:

Sir, Might it not ameliorate the antagonism towards fracking if the government were to agree that part of the proceeds would go to setting up a new sovereign wealth fund?

Michael Melville, Great Chishill, Cambs.

Cracking idea.

For some inexplicable reason, people love the idea of hypothecated taxes and I'm sick and tired of hearing about Norway's oil fund. They had as much oil in "their" bit of the North Sea as we did but have only a tenth of our population, and they have super-high tax rates on oil companies, so it's hardly surprising there's a surplus.

So first of all, you have to have a proper tax system in place. With natural resources, the simplest thing is for the government to pay businesses to get stuff out of the ground.

So once somebody has worked out how much stuff is down where, the government puts it out to tender and whichever business offers to extract a certain minimum amount per year for the lowest price gets the gig. As far as I am concerned, they can agree a net-of-tax price so that the business doesn't have any hassle with corporation tax or PAYE afterwards.

That means the company has a stable flow of income (it can choose whether to incur large set up costs and extract it all quickly or spend less and extract it more slowly) and it is protected from most of the downside risk. The government on the other hand, has all the up- and downside risk, but at national level, this scarcely matters.

And then you bung all the money from the unearned gas profits (market value minus extraction costs) into a wholesome sounding fund. The Greenies will want it to be spent on windmills, the CPRE will want it spent on conservation, a sane person would want it spent on reducing the deficit, we can have that argument afterwards.


Bayard said...

The short answer is "no", it wouldn't. Once any money is in the hands of the pols, no-one trusts them not to piss it up the wall, regardless of what you call the fund.
The only way to "ameliorate the antagonism" is to stuff the antagonists mouths with gold, i.e. give the people who live above the gas reserves a slice of the revenues.
The gov't aren't going to do that as they want as much money as possible to piss up the wall and no, Mark, there's no chance of any of it being used to pay down the deficit, that a) doesn't make anyone important any richer and b) is no fun.

Kj said...

Are the rents that huge from fracking anyway? Whatever you think of fracking as an activity, it has environmental externalities one would want compensation for/ameliorating, to much higher degree than offshore gas, and the production costs are higher from the outset.
But there are probably some, and they should be collected. If they are a lot, such as a two-figure percentage of the economy, you should certainly stagger the degree to which you introduce these rents into the economy. That's the genious about the sovereign wealth fund of Norway, to carefully drip money so that politicians can piss less up the wall each year than going for an all out spending spree. Nothing else.

Kj said...

Slightly related, at marginal revolution, on hypothetical export restrictions on natural gas:
Addendum: Matt Yglesias comments. In brief he argues for the tax on Georgist grounds. Just because natural gas comes from land, however, doesn’t make a tax on natural gas equivalent to a tax on land. It’s the value of unimproved land that should be taxed not the value of the improvements, namely the extraction of the gas.

Referring to this article.

Which is a very lacking analysis of what land is ofcourse. I've always thought of Tabarrok in the Caplan-crew of assassins of georgism, but at least he acknowledges the value of taxing land in the narrow sense.

I commented, still pending; export restrictions are not georgist, as they only reduce rents and distribute benefits to consumers of gas.

Some commenter even brought up your choice of optimal resource taxation MW:

Merijn Knibbe August 21, 2013 at 6:49 am

Extracting the gas should not be taxed, of course. But the gas itself should be taxed. Or lets turn it topsy turvy: nationalize it and let the companies pay the government for the right to extract and sell it. Works well:

Mark Wadsworth said...

B, true.

Kj, they say that fracking could provide all of Britain's gas for the next 50 years, the total selling price of gas in the UK is about £30 billion a year, even if the "rent" is only a third of that, it's still a sizeable sum of money.

"export restrictions are not georgist, as they only reduce rents and distribute benefits to consumers of gas"

Good point. But there are lots of consumers and only a few producers, so it is still a little bit Georgist. Better than no tax at all.

"Or lets turn it topsy turvy: nationalize it and let the companies pay the government for the right to extract and sell it. Works well:"

Yes, that is what a lot of countries do an it "works well". But if the price of gas or oil rises a lot, then the winning bidder still collects a lot of rent.

And if it falls, then he has lost a lot of money.

So there is a lot of gambling and corruption involved.

Under my system, the whole thing is pretty risk free for the business which does the extracting and for the government - unless the price falls BELOW the extraction cost (unlikely) in which case the government starts making a loss on the deal (bad).

Kj said...

Good point. But there are lots of consumers and only a few producers, so it is still a little bit Georgist. Better than no tax at all.

But it raises the price for other consumers (foreign). This has been played by Norway for quite some time, stalling and political opposition against expanding electric export cables, to maintain lower domestic prices. But it does benefit consumers. Iceland has more hydroelectric/thermal than they know what do with, and can use it for ultra-cheap consumption electricity and aluminum smelters, because there is no feasible way to export.

Under my system, the whole thing is pretty risk free for the business which does the extracting and for the government - unless the price falls BELOW the extraction cost (unlikely) in which case the government starts making a loss on the deal (bad).

In the long term, this ought to be factored in the rents the companies were willing to pay I guess. But as we know from the 3G auctions, private companies are no geniuses when it comes to calculate future earning potential either, so maybe it's for the better for govt. to sit with the risk of having slightly less rents. In a way, the higher rate income tax solves this in a decent way. The disadvantage is that it's very complicated to monitor, and probably not the best solution for fracking which is less transparent.

Mark Wadsworth said...

Kj, clearly, you can't apply my system to 3G rights. IN that case auctions is best.

So we have various ways to collect or redistribute the rent from monopolies:

1. Annual tax on market value (land-location values)
2. Twenty year auctions (3G)
3. Government retains the monopoly and pays others to do the work (oil and gas)
4. Export restrictions.
5. Price caps (works with e.g. water or railways)
6. Very high corporation tax rates (Norway and Netherlands do this with oil companies).
7. I am still not sure what the best thing is with fishing in the North Sea.

I have wanted to do a post summarising these for ages. Or has somebody already done one.

Lola said...

Surely oil and gas are 'land'? So the value of the little plot that the production facilities sit on has huge value. Why not just use LVT rather than all this state monopoly bit. Doesn't LVT implicitly recognise that 'land' is owned by the 'state' i.e. 'all fo us'(as opposed to 'government' who are just the peoples admin overhead) anyway?

I hate the thought of any 'government' managing to hold of anything vaguely commercial at all. It always leads to cronyism and boondoggling. If the 'government' just sticks to raising taxes in the least economically damaging way it all provides much less opportunity for corruption.

Mark Wadsworth said...

Kj, actually, we can add two more to that list:

8. Roads - owned by government and they charge user charges (mileage or simple fuel duty).
9. Just nationalise it (water)

L, yes, I'm not saying that any of the methods above are absolutely perfect, and different types of rent can be taxed in one or more ways.

So water companies could have price caps AND a high rate of tax, or could be nationalised.

With oil or gas, yes, you can use method 1 or 2 or 3 or 6 of any combination. But oil and gas companies have to be able to plan twenty or thirty years ahead - so if the rights are auctioned off for thirty years at a time when oil is $60 a barrel and the price goes up to $100 a barrel, then the oil company is collected $40/barrel in rent.

Under 3, the extracting government doesn't need to get involved any more than sticking a valve on a pipe.

It pays the extractor £x per unit for what goes in, and then the stuff is immediately sold off at normal market prices to whichever private company wants to buy it, refine it, pipe it etc.

And the end user might well be exactly the same company as the extracting company, makes no difference.

Kj said...

Lola: I don't think nationalised/public monopoly companies need to always that bad. Having the constant threat of privatisation/de-monopolisation can actually work wonders. And yes, some of the New Public Management stuff works in arms-length type state companies. It all depends on the political/cultural climate. The Norwegian alcohol monopoly has been a raging success as a brand name, for the last couple of decades, because they have been hanging in a thread. In Canada, some Crown Corporations are very popular and operate efficiently by most standards.

MW: I meant that the one-off band-auctions tend to get crazy, not that public operation are the best.
#7: I tink just bidding for quotas, but the devil is probably in the details.

neil craig said...

If it is spent on reducing the deficit, which is indeed the sane choice (except for X-Prizes) then there is no sovereign wealth fund just a reduced sovereign national debt,

DBC Reed said...

So that's oil, gas, water and railways to be nationalised! Go any further and we'll have caught up with the pre-1914 consensus that the natural monopolies should not be in the private sector.
Clearly the privatised housing industry in the UK has been a total failure and its time to get back to big local authority building programmes (which mad Margaret made illegal.) Above all there's the banking system: the private sector cannot even run this, which is literally a licence to print/create money without continual scams and law breaking though the consumers and producers are kept short of money.
( Also languishing in private rent-seeking hands: the pubs. Nationalised pubs during their brief existence were a complete success. See The People's Pubs on Net.)

DBC Reed said...

See above: The People's Pubs is by Phil Mellows and best Googled by putting the author's name first.

Kj said...

DBC: whoa. There are natural monopolies, and there are pubs.

Kj said...

DBC: whoa. There are natural monopolies, and there are pubs.

DBC Reed said...

I can't believe you are jibbing at nationalising pubs; not when you are extolling the Norwegian Vinmonopolet above. There is no difference in principle surely? Publicans and their customers have to be rescued from the pubcos in the UK which make money from the rents they extract from tenants, not from selling beer.

Kj said...

We don't have nationalized pubs, we have a retail monopoly. Vinmonpolet works, because it's a narrow operation, selling liquour off the shelves. Pubs are a service-based business, in which how, where and what is best left out of politics. We have enough politics concerning Vinmonopolet, thank you.

Kj said...

And I wasn't extolling the virtues of the monopoly, I was just remarking that it's relatively efficient, and has high recognition as a brand. In large part because it's constantly under threat of abolition.

DBC Reed said...

Nationalising pubs is a form of retail monopoly which in the Uk was very successful. You cannot leave pubs out of politics ,when they are subject to the worst form of rent seeking and going out of business in droves. Public sector businesses are supposed to be above politics: vide the BBC . It is actually private sector businesses that see everyday political interference : the newspapers, the banks , the so- called housing (artificially restricting) supply industry. Don't be so superstitious. You cannot cling onto the failing status quo because you have decided some tried and tested methods are beyond the pale by being the agents of red terror. The UK needs a rebalancing of the private and public sectors after a period when the private sector (banks and house builders) wrecked capitalism.

Kj said...

DBC: Now now. Again you think that manicuring the branches is anything the same like striking at the root. Businesses, be they pubs, grocery stores, factories, whatever, are under the yoke of monopoly-friendly regulation, high taxes on productive activity, and the privatisation of land rents. Fix that. There's no need for anyone to politically manage pubs. There's also the possibility that some pubs fail because there's no market for them. It's not superstition, it's acknowledging the Hayekian knowledge problem.
I know about the nationalised pubs, that AFAIK ony appeared in one county in Scotland (?). It's a nice anecdote, but I don't think that, or Vinmonopolet, which exists because of a very specific historical/cultural/political condition, can be taken as evidence that government is excellent at managing drinks related businesses...

DBC Reed said...

@KJ And you are ignoring the fact that the private sector is currently manifestly crap at managing drinks related businesses in the UK.
Phil Mellows and his The People's Pubs published in The Publican is the go-to geezer for info on the so-called State Management Scheme.
The Carlisle scheme straddled the border with the big munitions factory just in Scotland at Gretna and most of the drinkers/workers in Carlisle, in England.But there were also a similar scheme in Invergordon (listed as Cromarty Firth but this is open water); Invergordon was the scene of a stirring naval mutiny in 1931 to which the pubs must have contributed usefully.And there was Enfield in North London about which there is no info.
Mellows does not mention that State Management Schemes were provided for in the British New Towns by the 1949 Licensing Act, shortly to be abolished by the incoming Tories using the kind of half-arsed politically motivated arguments provided by incorrigible lightweights like Hayek.
The heavyweight right -wing argument comes from Henry George himself who proposed scrapping the licensing laws altogether for restricting supply, putting up prices and so abetting rent seeking.He makes sense.
Either Henry George or State Management; there is no middle way.

Bayard said...

DBC, the main problem about nationalisation is the same problem about lending your tools on a building site, which is that very few people give a stuff about anything that isn't theirs. (and that's "theirs" in a real "I can buy it and sell it" way, not in "theirs" as in a nationalised industry "belongs" to the people of Britain way). So once a business no longer has any real owners, to worry if it makes a profit any more and, worse, no longer has to make a profit, because there's the magic taxpayers' money tree to bale them out when they lose money, it becomes inefficient and unprofitable. This is not a matter of economic belief, it is a sad fact of human nature.
Yes there are some activites that are better carried out by the state than by private companies. If you have a state-run army, you can have a state-run rail system, but just taking the existing private companies and have the state purchase all the shares in them is, as we know from experience now, the best way to get the worst of both worlds.

DBC Reed said...

Problem is the private sector is not very good at managing drinks related businesses either.Pubs are closing in droves (and in Brit villages middle class people often buy vacant pubs and run them as co-operatives.> See Net)
Price discovery, a statement of the bleedin' obvious as spun out by Friedrich Hayek into a complete Nobel Prize winning career, only works absent rent seeking. The British housebuilding industry ( so called) is very good at discovering the extortionate prices that people are prepared to pay then restricting supply to keep those prices artificially inflated.
Economic practice is more informative than economic theory. It does n't matter if you discover the correct price level if you then ignore it or, more usually keep it inflated by rent seeking.

The State Management Scheme was most developed in an area straddling the border with the key munitions works just in Scotland at Gretna and the workers living in Carlisle in England.(This scheme continued until the 1970's) There was another scheme listed as Cromarty Firth ,but, as this is an open stretch of water , it probably refers to Invergordon, a naval dockyard town, scene of a stirring naval mutiny in 1931.Another scheme ran in Enfield ,about which information is scant.
What even Phil Mellows appears to be ignore is that State Management was not just a First World War arrangement: it was included in the 1949 Licensing Act to cover licensed premises in the New Towns.The private sector uber alles Conservatives kiboshed this idea before it could get started ( the same way they finished Snowden's Land Value Tax , although he was their partner in the National /Grand Coalition Government).Ultimately the Conservatives kiboshed the New Town movement as well: it remains completely beyond them to plan a new community bringing together cheap housing and good employment opportunities (See earlier "CHANGE")
Do not forget that Henry George came up with the ultimate laissez faire solution to the booze problem: abolish licensing altogether and, for instance,serve alcohol at newsstands.Its either that or State Management : there is no middle way IMO.

The Stigler said...


To be honest, rail is, in that regard, nationalised anyway. Because of the faux privatisation, the stations are still owned by Railtrack (the state), the trains are either owned by the state or by rolling stock companies.

Which is why it cost nearly a billion in improvements to Reading Station (add if anyone gives a Sam what the inside of a station looks like).

Bayard said...

"Because of the faux privatisation, the stations are still owned by Railtrack (the state), the trains are either owned by the state or by rolling stock companies."

They may be owned by the state, that is only because the state owns the companies, which worse than either the railways being completely privately-owned or completely state-run.

(add if anyone gives a Sam what the inside of a station looks like).

I suspect most of that money has gone on the track reorganisations, which, AFAICS are sorting out a nonsense that was a legacy of the old railway companies.

Kj said...

TS: Isn't it Network Rail who owns the tracks?
New Zealand is one example of a modern nationalisation of railways in recent years, from what I understand was more or less like the UK model, to what is currently known as KiwiRail. I've not been able to make up my mind about the benefits that has brought, other than the classical right/left viewpoints I've found on the net:
Right: "means greater subsidies, should slaughter a third of the tracks and put up for sale, again", and Left: "is beautiful and means railways will expand and sprinkle fairy dust along it's way". If anyone knows of a slightly more unbiased account, please let me know :)