The last word on why the deficit doesn’t matter

Chris Dillow makes sense:

“If people are prepared to lend to government at less than 1% real interest, let’s bleed them dry, because cheap money won’t last forever; infrastructure spending should be undertaken now, whilst it’s cheap.”

The construction collapse will have the same effect on labour costs, which we can offset by removing the impact of crowding-out from multiple public-sector projects. So let’s go for 200,000 new council houses (£20bn); a TGV line from London to Leeds via Birmingham and Manchester (£20bn); and nuclear power stations covering 30% of UK energy requirements (£40bn); while also going ahead with Crossrail (£10bn).

These would raise the national debt by 7% of GDP to levels that are still historically fairly low, while adding £900m per year of real interest to be met by taxpayers (approximately a 0.1% increase in government spending).

If I was in a political party that looked almost certain to lose the next election, then borrowing an enormous amount of money to spend on infrastructure projects that won’t be completed for about 10 years (by which point the next government will be so tired and jaded that nobody will credit them with the achievement), would be top of my list of priorities at the best of times. The fact that it currently makes economic sense to do it is a happy coincidence, and hopefully one that’ll work in all our favour…

20 thoughts on “The last word on why the deficit doesn’t matter

  1. Yes. The govt could also win some environmental brownie points by investing some serious money in areas where basic economics suggests that the private sector will under invest (because of externalities, co-ordination problems etc.). Potential investments might include building a low power loss 'intelligent grid' transmission network (across Europe even), insulation and solar or air pump heating for homes and offices etc., research into new hydrogen manufacture and transportation technologies and so on and so forth. They could do this with great fanfare, talk about making the UK a global leader, create jobs, and all with reasonably sound economic justification (it seems to me).

  2. That costing's based on the £2.3bn price per GW of Olkiluoto (the one Areva are building in Finland), *after* the 50% overrun, and on the current capacity of 77GW. It actually works out at £43bn, which I suppose I should have rounded to 45 rather than 40 really.

    Is that really unrealistic? I'd've thought that we'd only cock the process up as much as the Finns have managed, rather than substantially more – especially as Areva should have learnt a bit about building reactors outside of France for clients who aren't EDF from the problems they ran into with Okiluoto…

  3. 1. "*after* the 50% overrun".

    Bless, once more. The thing's got three more years before it's built (assuming it stays on schedule). As Kenny Rogers sang in "The Gambler", you don't count your winnings while you're sitting at the table, and you don't count your cost overruns in the nuke industry until your power plant is generating.

    2. Unfortunately we would have to build our power stations in the UK – building them on an island off the coast of Finland would certainly make the planning process a lot quicker and cheaper, but it probably wouldn't be allowed.

  4. @ 1 – fair enough, we’ll see
    @ 2 – so you’re an enormously unpopular government about to lose the next election – put through the “Nuclear Power Station Planning: Fuck You All Act 2008” saying that anyone who wants to build a nuclear power station adjacent to an existing one is allowed to do so, and anyone who doesn’t like it is allowed to fuck off.

  5. I suspect that they would indeed fuck off, straight to Strasbourg to sue you for depriving them of their right to due process. And that's assuming that the "Destroy House Prices For The Benefit Of Nuclear Power Act 2008" got through Parliament – on the face of it, it seems quite unattractive to Labour backbenchers and not the greatest candidate imaginable for Tory support.

  6. 1) two possibilities: either hearings and enquiries do take place, but they do so under the French model, which is presumably considered acceptable under European law – or you go ahead with the project and commit all the money while the case is still grinding through Strasbourg and effectively force the incoming government to ignore whatever the court rules.

    2) what house prices will be destroyed exactly? I'm suggesting building two 1.6GW plants at Oldbury, two at Dungeness, two at Hartlepool, two at Heysham, two at Hinkley Point, two at Wylfa, two at Sizewell, and two at Sellafield (it's a bit of a waste of the Hunterston and Torness sites, but means you don't have to get the Scottish Government involved). The "OMG LETHAL RADIATION!!!!!" house price cut is already priced in for all these sites – and the locals are generally quite keen on nuclear power, because it means they have jobs instead of not.

  7. I’m reading John Kay’s ‘The Truth About Markets’ at the moment, in which he describes how, in the mid-sixties, the decision to build five new gas cooled reactors turned out to be “probably the worst economic decision ever made by the government of a rich state”. The average build time was 20 years and it was 30 years on average until output matched plans, at a cost of £50bn at 1996 prices.

    Which makes me wonder: should we look at that and say “see, look how terrible nuclear power is” or should we say “see, our perceptions of nuclear power are heavily skewed by a single bad decision made nearly 50 years ago”? Although I guess data is available on more recent technologies, as you discuss above.

    Something else Kay says got me thinking. Nuclear power has high build costs and low running costs. Fossil fueled power has low build high running cost. If we built too many nuclear power stations and the price of electricity fell / stayed low, those stations would lose money, in the sense of failing to achieve private returns for investors, but the costs would be sunk and they keep running. Whereas fossil fuel stations would close down, because the high running costs would make them uneconomic (and the least efficient would close first). This is not a happy scenario for private investors in nuclear power, but it ought to have its attractions for environmental campaigners, no?

    The main things that worries me about anti-nuclear campaigners is the risk of shutting down a technology learning curve, with such great potential, so soon. I know they are not campaigning to end research, but there’s a big difference between the lab and the real world, so there’s an argument for building some new commercial nuclear plants, just to keep the tech development on track. (this isn’t a knock down argument – it’s the a ‘pro’ that may be outweighed by cons).

  8. the risk of shutting down a technology learning curve, with such great potential, so soon

    What learning curve? Nuclear power stations are 1950s technology. They aren’t going to make any order of magnitude improvements. The learning curve arguments are all in favour of renewables, not locking ourselves into an obsolete technology path.

    and the locals are generally quite keen on nuclear power

    Absolutely definitely not true of Wylfa; I don’t have first hand knowledge of the other sites but suspect the same.

  9. Well I agree that there are learning curve arguments in renewables, which is why I want to see (intelligent) state funding of nascent technologies because I think the private sector can under supply ‘discovery’ (a Rodrik argument). I certainly don’t want to get locked into an obsolete technology path.

    I don’t want to get locked out either. I don’t know enough about the specifics of nuclear technology to say this with too much confidence, but I’m baffled by your statement that nuclear is a 1950s technology with no learning curve. You can look at the wikipedia page “nuclear power technology” as easily as I can, but seems to me like advances are being made. I don’t know about order of magnitude improvements; I’d settle for steady improvements on safety and cost. Plus, on the build and commercialization side of life, learning-by-doing is not about technological leaps forward, it’s about organisational cumulative experience.

    If nuclear power can be made affordable and safe, surely that’s an outcome everybody wants – especially greens who want to see carbon emissions fall asap. I have no strong opinions either way, which is why parallel development of nuclear and renewables seems like a good idea to me.

    What worries me about this debate, is rather than being open minded Popperian truth seekers, with everyone looking for the strengths and weaknesses in every argument in order to update their own positions, it’s full of people looking for weaknesses in their opponents arguments and ignoring the weaknesses in their own. I don’t mean you, here, D2. I’m thinking more of organizations like Greenpeace, who don’t strike me as people who are looking for arguments in favour of nuclear power because they seek the truth. In this context, deciding first and fitting your arguments second, is a very bad way to proceed.

    Of course, they might already know the truth, and I don’t.

  10. @ D2 – absolutely definitely true for Sellafield. And on Wylfa, the local Plaid MP backs new build, as do the local council. The council claims 84% public support for a new plant, but I haven’t been able to track down any primary poll data and have no idea whether their methodology is flawed. I’d be bloody surprised, given that the power station and aluminium factory are the only actual sources of empoyment in North Anglesey, if the opposition is as unequivocal as you reckon, and mildly surprised if the population isn’t in favour overall.

    @ Luis – you’re right, they don’t.

  11. There is a bit of agriculture and tourism in Anglesey these days – I’d be surprised if Wylfa B plus Aliwminiwm Mon were 2000 jobs between them. The Anglesey council were always cooking up dodgy polls when I was a lad there – they might have got more honest but I doubt it and frankly I wouldn’t trust Ieuan Wyn Jones further than I could spit a rat.

    I’d settle for steady improvements on safety and cost

    But it’s been literally fifty years – what major gains, realistically, are we likely to see? The current nuclear industry is about as good as it’s going to get.

    My own view is that I would only be open to arguments about new nuke power stations once it had been demonstrated that everybody who had ever worked in a senior capacity in the British nuclear power industry before, say, 2005 had been sacked. I just don’t trust them.

  12. Wouldn't EdF, who've demonstrated reasonable (in the sense that they generate 70% of France's energy using nuclear for the same order-of-magnitude cost as our fossil fuel base) competence at nuclear power station management, be just reluctant as you to employ proven idiots?

  13. "200,000 new council houses (£20bn)"

    For that sort of money, you can have 500,000 council houses, assuming councils can wangle the land more or less for free (not difficult when you are in charge of granting planning permission). Which is the sort of number that we were building in the 1950s and 1960s.

  14. Nuclear power stations are 1950s technology. They aren’t going to make any order of magnitude improvements… But it’s been literally fifty years – what major gains, realistically, are we likely to see?

    Not sure how well this argument would apply to other technologies. The petrol engine, for example, was fifty years old in 1926 – it's fair to say that there have been impressive gains in reliability, safety, efficiency etc since then.

    Or, to take a few technologies that are roughly the same age as nuclear power: would you really be willing to rule out any order-of-magnitude improvements in electronics, radar, jet-engined aircraft design, rocketry, or radio astronomy? Has computing really hit a plateau from which further improvement is impossible?

    I'd agree that nuclear power hasn't developed as far or as fast as these! But it does show that being 50 years old doesn't necessarily mean that a technology has reached its limits…

  15. given the slow-down and the latest projections for how far adrift the latest chancellor will be in his forecast of the budget deficit – his predecessor was not exactly dead-eye dick, even when his revised forecasts appeared a matter of months before the budget – how much more can we afford to spend? It's about time we spent something on infrastructure but I don't trust this administration to do it. I live beside the M1 and it is baffling how long they are taking to widen the road…whenever I pass by, no one appears to be working aor doing anything. It's like watching a plant grow.

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