Three economic zombies worth fighting

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Greetings; I hope everyone has spent Easter in a relaxing way. During the long weekend I came across a number of examples of economic policy views that seem widely held even though their logic to me seems comprehensively flawed. Economists such as John Quiggin and Paul Krugman use the term “zombies” for ideas that keep coming back to life no matter how many times they have been killed. So below are three zombies of my own — though I’m not sure they quite fit the zombie metaphor, since they may not have been properly killed in the first place. If you have a good idea for a better term, send it my way.

The first idea is the western sense that China’s huge capacity boost for producing green tech — above all electric vehicles, batteries and solar panels — is a threat. This fear has been palpable in Europe for some time; the complaints of the carmaking industry are well known. It is now clear the US is following Europe’s example, with Treasury secretary Janet Yellen warning China not to “flood the world with cheap clean energy exports”, as the FT reporting puts it.

These are, of course, the very same governments that think it is important to decarbonise their economies and get to net zero carbon emissions in very little time. China has been willing to put in place the green tech subsidies and other government support that the west has until recently shied away from. What, precisely, is not to like about the resulting flood of cheap clean energy exports? Would it be better to reduce the flood to a trickle, so we have less of the kit it takes to decarbonise? Or to have a flood of expensive rather than cheap green tech supplies, to make decarbonisation costlier?

The intellectual short-circuit that offends me is to simultaneously complain that it is too hard or expensive to decarbonise and that the tech to do so is too cheap and abundant. You can’t have this both ways. And the way to take it should, of course, be to celebrate cheapness. My favourite story over the past week was my colleagues’ reporting that Dutch and German homeowners are using Chinese solar panels for wired-up garden fences — that’s how cheap they have become.

What the photovoltaic garden fence story shows is also something more serious: that it is too difficult or expensive to find roof installers at the scale needed. This hints at a more general problem, which is what the detractors really seem to have in mind: western countries don’t actually intend to install or buy as many panels or batteries or EVs as they need for their net zero ambitions; they would rather reserve their custom to local companies for those insufficient numbers.

For the dirty secret is this: the Chinese “overcapacity” (see my colleagues’ chart for PV cells below) is measured relative to actual demand. But our actual demand is far too low for our supposed goal of decarbonising fast. So our real task is to boost demand, not to limit supply. In practice, this would mean something like accelerating limits on selling internal combustion engines, massively training green tech installers and ensuring much bigger orders of green tech, whether through subsidies or directly through public procurement. Make demand sufficient, and there will be contracts also for western manufacturers so that they will find it viable to keep their factories open, even expand. (Of course, the EU’s carbon tariffs should be widened to cover finished manufactures, just in case China’s factories have a higher carbon footprint than European ones.)

The second idea is the illusion that debt has to be repaid. This came to mind with the latest news of the slow-rolling insolvency of at least some companies in the convoluted corporate structure of Thames Water, the supplier of water to the people of London and its surroundings. (FT Alphaville’s Bryce Elder has as good a guide to the corporate engineering as you will find anywhere.) But it is a deep current of policymaking everywhere. As I have explained in a book, the European sovereign debt crisis became hugely more costly than it needed to be because politicians resisted writing down the excessive debts of governments and banks. Exactly the same misguided policy approach was on display with the bank failures in the US and Switzerland last year. And repeating the west’s mistakes by resisting to force losses on lenders is, in my view, the biggest thing holding back China’s growth.

In the case of Thames Water, there is some debt owed by the companies that own the water company but do not themselves supply water. Part of this is coming due soon, hence the urgency in the news. But no harm needs to come to the water supplies if this debt can’t be paid — conversely, there would be harm if any money was extracted from the actual water company to pay this debt — as in the case of a default, normal insolvency procedures could simply wipe out the shareholders and make the creditors the new owners. There is also an amount of debt owed by the actual water company. But here, too, we should not worry too much about doing the same thing: wipe out the owners and turn the existing creditors into the new shareholders.

People will point out a variety of complications and the need for fresh money to invest in upgrading the decaying infrastructure (don’t go swimming in the UK without checking the latest sewage discharges). The owners and any potential investors would like the regulator to put more of the costs on (captive, let’s note it) consumers through higher bills. But the main point, which keeps getting lost, is: Thames Water with no debt (because debt has been written down and creditors replacing former shareholders) is both a better investment prospect than with the current indebtedness, and one that has less need to charge its customers more. Any proposal for Thames Water should show how it takes on board that simple but rarely admitted truth.

My third bugbear is a particular form of opposition to the minimum wage. The policy is in the news because it is 25 years since it was introduced in the UK, and it has now achieved the longtime aspiration level of two-thirds of the median wage for workers above 21 years of age, and has not reduced employment. As Gavin Kelly explains in an FT op-ed, “this is what a policy triumph looks like”. (For the benign consequences of minimum wages more universally, see the seminal paper by Doruk Cengiz, Arindrajit Dube, Attila Lindner and Ben Zipperer.)

I may exaggerate slightly about the minimum wage, which is now widely accepted as something that is not harmful to employment and could even boost productivity. But old habits die hard and there is still an instinct in policy circles, let alone in business circles, to assume that stricter rules for how employers treat their workers are ipso facto a brake on productivity. A case in point is how the UK Labour party’s promise to increase worker protection has ruffled a lot of feathers among those the party wants to be its new corporate friends — to the point where Labour itself is treading cautiously.

Two things should be clear. It cannot be an argument against enforcing the laws already on the books that it would be inconvenient for businesses to have to follow them. Weak enforcement (Kelly points out that hundreds of thousands are paid below the legal minimum in the UK) only serves to undermine law-abiding companies. And when strengthening labour standards makes it more economical to invest in machinery, or in more rational work processes (such as planning shifts in advance), then making it harder for businesses to stick to their unproductive habits is a feature, not a bug.

Other readables

Economics is a notoriously imperialist discipline that is much more likely to colonise other fields than be colonised by them. The exception was Daniel Kahneman, the social psychologist who revolutionised economics, and who died last week. Read my obituary of Kahneman here.

Religion and politics don’t mix well, says the FT’s editorial board.

The New York Times has a nice write-up of the debate around what path poorer countries can take to economic development when manufacturing requires fewer and fewer hands.

Oppenheimer in flip-flops: last week’s FT magazine profiled the entrepreneur who is leading the use of artificial intelligence in weapons systems.