The Fiscal Black Hole

Richard Murphy, the accountant and policy analyst, has just produced a video on the fallacy of the £20 billion black hole in government finances. It is worth watching, but can you spot the hole in his argument?

Murphy is partly correct, but also dangerously misleading. He has forgotten that there is a fixed supply of some things, such as land, which all buildings require—homes, factories, shops and offices. Creating money too freely leads to a land price boom. This was the main long-term effect of Quantitative Easing. It sent house prices sky high. 

The notion that unemployment is due to shortage of aggregate demand is the great Keynesian fallacy. If Murphy understood the idea of the NAIRU (the Non Inflationary Rate of Unemployment), which has been around since 1959, he would know that pushing money into the economy cannot get rid of unemployment without causing accelerating inflation. Money has lost 98% of its value since 1945. It is one of the reasons why Britain's industry has all but disappeared.

Governments can indeed create unlimited money but it then needs to be withdrawn from circulation through the tax system. When the tax system punishes honest work and wealth creation, it is not fit for purpose, but that is what we have had for the past 80 years.

The link to the video is here.

The case for locomotive hauled trains and refurbishing old rolling stock

 This discussion arose from a YouTube comment.

“Keep operating super old locomotives is not exactly environment-friendly or even cost-efficient.”

This is true as a broad generalisation. However, the energy consumption of rolling stock and infrastructure has to be calculated over its entire life cycle, from mine to scrapyard. I cannot lay my hands on the figures, but I understand that at least a third of the energy consumed by a train occurs in mining and refining the raw materials and construction of the vehicles. Large amounts of energy are used to just to dig out and transport the minerals and convert the ore to aluminium metal, while aluminium welding is also an energy-intensive process. Aluminium mining is not environmentally friendly. Similar considerations apply to electrification infrastructure and battery technologies.

As regards cost, around a third of the total is for the capital costs of the rolling stock. This is usually reckoned to be fully amortised after 20 years, after which the costs are reduced to just the marginal costs of maintenance, overhaul and refurbishment. Since rolling stock has to be robust enough to withstand the arduous railway environment, it will last for 60 years with a mid life refurbishment. This is why we still see elderly trains in service, for example, locomotive types such as the British classes 20, 37 and 73, German class 232, the Swedish type RC, and various trains on London Underground. It cannot be economic to scrap serviceable rolling stock when replacement of some of the components is all that is needed.

“Newer engines can dramatically decrease energy consumption.”

Indeed. Trains such as the British IC 125 stock, the class 56 diesel electric locomotives and the class 73 electro-diesels have been fitted with new engines from EMD and MTU, which not only cleans up the emissions but also makes them more powerful.

“Besides if the train is too short, then using a heavy locomotive to haul it would cost a lot of extra overheads.”

It might, but a locomotive capable of hauling 3 carriages should not weigh more than about 70 tons, and the carriages themselves will be lighter as they will not have the heavy traction equipment built in. A slightly larger and heavier locomotive – say 80 tons, will be able to manage 6 coaches, of which some can be taken out of service when they are not required, and this is a useful opportunity to carry out tasks such as cleaning and maintenance. There is a further issue – the spread of on-train signal systems such as ERTMS. This is extremely expensive and has to be installed on every train capable of running independently. It makes economic sense to fit it all into a single vehicle – a locomotive.

“You can of course only hook for example 3 carriages to a loc, but that won't really decrease carbon footprints. A 3-car MU would draw much less power and use weaker but adequate engines.”

Railway operation accounts for 0.7% of total UK carbon emission. It isn’t even worth the effort thinking about it. However, if decarbonisation of the railways adds to costs or makes rail less attractive in other ways, then the result will be increased emissions.

SNCF shutdown should be a wake-up call

The recent large scale shutdowns on French railways have been variously attributed to hostile action, terrorists, leftist agitators and Russians, but similar incidents have occurred by accident. A few years ago a small fire in an equipment cupboard shut down train services over a wide area around Gothenburg, and it took a fortnight to get things back to normal.

A couple of weeks ago there was the worldwide dislocation caused by an upgrade of Windows computer systems which went wrong. Similar large scale disruption to electronic systems can also be due to natural events such as solar storms. Total shutdown of tills in shops throughout Sweden are common, apparently because of a failures of the VAT central computer system.

Critical infrastructure such as transport, water supply, mains drainage, electricity and gas are all vulnerable. 

Until a few decades ago, the signals and points at Brighton were controlled from a signal box at the end of the platforms. If anything went wrong, the staff in charge could seen out of the window and fix it on the spot Then the signal box was closed and the control was moved to a signalling centre at Three Bridges, 25 miles away. When communication is lost, there is little that can be done by those on the ground.

This ought to be taken a as a wake-up call, but it won't be.

A thought about money

I noticed that there has been a flurry of discussion recently about what is known as Modern Monetary Theory (MMT)). It strikes me as a bit half-baked but the proponents of MMT may have a point.

The usual view is that governments collect tax and spend it to pay for their activities. I believe this is exactly the wrong way round. As I understand it, official money is created when government spends it into circulation to cover its expenses. The money must then be withdrawn from circulation through the tax system, so as to complete the cycle and prevent the undue increase in the quantity of money which leads to a general increase in prices as the value of money falls.

Now, it is essential to remember that one of the core functions of governments is to protect land rights and provide what is needed to make land habitable and productive, thereby creating sustaining its value. The government‛s primary duties are to defend the realm, protect land titles, make justice available to the people and provide the infrastructure which enables production. Without these, land would be of little value. In addition, service provided such as education and healthcare also enhance land value; one need only compare house prices in the vicinity of good schools to observe this effect.

It follows from this that the principal form of taxation should be on land, as measured by its market rental value.

Overdue policies that will probably not happen

A handful of overdue policy reforms would alleviate many of the long standing problems that afflict the British economy. This are

Rationalisation of property taxation including

• Reform of the Council Tax
• Abolition of Stamp Duty
• Abolition of Capital Gains
• Business Rates to annual assessments and will with fixed equipment, buildings and plant being ignored in the valuation. 

Phasing out of VAT

Significant raising of thresholds for income tax and NI contributions.

Scrapping of VAT over a couple of years; it is damaging, inefficient and a solid obstacle to growth. 

Even if these changes were revenue-neutral, great benefits would follow. Of course, even though Labour has a huge majority in parliament, little or none of this will happen.

When the wind blows, the trains stop

For the second time this week, trains on many routes in the west of Sweden have been cancelled due to high winds: this happened on Sunday morning (7 July) and again this afternoon (10 July).

Apparently there is a risk of trees falling on the overhead electrification cables, and of the cables themselves getting blown down. The cables come down regularly; a couple of times a week, it is said. I have personally been caught up in two incidents. In the first, the train was stuck in a forest for four hours when the wires came down. This was on a lovely afternoon in July and passengers could enjoy the sun and opportunity to walk their dogs. The stay in the forest was so long because it took two hours to couple a rescue locomotive to the train. A month ago the passengers were ordered off a Copenhagen to Gothenburg train because the wires had been stolen, and that journey ended up with an overnight stay in a hotel.

Which raises two questions. Why are trees allowed to grow where they are an obvious hazard? In steam days the trackside had to be kept clear because of the risk of fires. On electrified lines, the risk of disruption due to trees falling on the track is even greater.

The second is why are the lines electrified at all? Now that electricity is priced on the Europool market, it is not cheap, and there are many lines where there is not enough traffic to justify the cost of putting up the wires and keeping them in order, which is an onerous task in itself.

Perhaps some of this electrification infrastructure should be removed when it is life expired?

New tri-mode locomotive is exactly wrong

The Stadler class 93 locomotive is a tri mode (diesel/25kV electric/battery) unit intended for both freight and passenger train haulage. Its power is given as 6200 hp on electric traction, 1250 hp on diesel and 540 hp on batteries. Its main purposes is to haul high speed intermodal freight while avoiding diesel running under the wires, with diesel and battery power for the ʻlast mileʼ.

This looks good but is exactly wrong. It is, presumably, a very expensive piece of kit, each one probably costing over £3 million. It that looks like it is brutal on the track - tiny wheels and a 21 ton axle load are a recipe for heavy wear. 

Freight trains should not be traveling at high speeds. It wastes energy and damages the track - the modern container carriers with small wheels are track-bashers, and modern passenger trains are also destructive to the point that it is becoming a real problem; the poor state of the track is evident on, for instance, the Great Western Main Line. 

Electricity does not come out of the sky. Supplies will have to be enhanced to get rid of diesel running under the wires, and overall thermodynamic efficiency goes down. 

The advent of this design points yet again to look at using steam as a benchmark. The 9F freight locomotive delivers over 3000 hp when using coal and about 20% more on diesel fuel. The initial cost of a steam locomotive would probably be a quarter of that of the tri-mode and much the same to run.

As a production locomotive, a new design of three-cylinder 2-8-2 would be a stiff competitor, or another build of the proven 9F class, though the track would have to be modified to allow them back on the national network.