Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Welcome to Meren Talks Money, the podcast in which people
Speaker 2: who know the markets explain the markets. I'm Meren zum
Speaker 2: zat Web. This week we're looking at why Britain has stagnated.
Speaker 2: I don't think anyone's going to argue that Britain has
Speaker 2: not stagnated. It has definitely been stagnating. But what can
Speaker 2: we do to trigger or indeed to catalyze future growth
Speaker 2: to change where we are. My guest this week is
Speaker 2: Sam Bowman. Sam as the founding editor of the online
Speaker 2: magazine Works in Progress, now part of payment processing platform Stripe.
Speaker 2: He has been Director of Competition Policy at the International
Speaker 2: Center for Law and Economics and an executive director of
Speaker 2: the Adam Smith Institute. Now we have specifically asked Sam
Speaker 2: on as a result of an essay that he co
Speaker 2: authored called Foundations why Britain has Stagnated. There we go
Speaker 2: that word again, which looks at the main problems that
Speaker 2: are plaguing us, how we can fix them, whether it
Speaker 2: is possible to fix those problems, and of course that
Speaker 2: is the defining task of our generation and indeed of
Speaker 2: this new government. So we are hoping that Sam will
Speaker 2: be able to diagnose the UK's problems and tell us
Speaker 2: how to fix them in a hurry. Welcome Sam, Thanks
Speaker 2: for having me. Well, it's a great pleasure. You know,
Speaker 2: we spend a lot of time on this podcast worrying
Speaker 2: about productivity, worrying about infrastructure, worrying about housing, and in particular,
Speaker 2: of course, worrying about the miserable real wages in the UK,
Speaker 2: because we firmly believe on this podcast that money can
Speaker 2: indeed buy you happiness. Now, I just wanted to set
Speaker 2: the scene, which you do at the beginning of your essay,
Speaker 2: and I imagine that an awful lot of our listeners
Speaker 2: will have read this essay already, but for those that
Speaker 2: have not, you've got a wonderful not necessarily diagnosis, but
Speaker 2: description of the problem at the beginning. So I'm just
Speaker 2: going to read a few bits of that so that
Speaker 2: our listeners can get a sense of what it is
Speaker 2: we're trying to talk about here. Okay, Ready, between twenty
Speaker 2: twenty four and twenty twenty one, that's before Russa's invasion
Speaker 2: of Ukraine, the industrial price of energy in the UK
Speaker 2: tripled in nominal terms. We have significantly more expensive electricity
Speaker 2: than many similar economies with almost identical population sizes. The
Speaker 2: UK's under thirty million homes, France has thirty seven million.
Speaker 2: And then there is this thing that I always find
Speaker 2: really interesting. We complain a lot about second homes in
Speaker 2: the UK ren but only eight hundred thousand British families
Speaker 2: have second homes three point four million French families do.
Speaker 2: If the world was a better place, our coastline would
Speaker 2: be plastered, literally plastered with second homes. Then everybody would
Speaker 2: have their own summer house. Back to Electricity pert Capital,
Speaker 2: electricity generation in the UK is just two thirds of
Speaker 2: what it is in France. Our electricity generation is closer
Speaker 2: to developing companies such as Brazil and South Africa, home
Speaker 2: of the regular blackouts. Britain's last nuclear power plant, and
Speaker 2: this is really important and I want to talk about
Speaker 2: this a lot of time. I'm a great fan of
Speaker 2: the idea of let's go all in on the nukes.
Speaker 2: Our last nuclear pad plant was built between nineteen eighty
Speaker 2: seven and nineteen ninety five. The next one, Hinckley Point C,
Speaker 2: is between four and six times more costly per megaworking
Speaker 2: capacity than South Korean nuclear pals. We've talked about this
Speaker 2: and that on this podcast before. It's ridiculous. Tramp projects
Speaker 2: in the UK two and a half times more expensive
Speaker 2: than French projects on a per mile basis. Now I
Speaker 2: know all about this because I live next to the
Speaker 2: tram line in Edinburgh. I have watched the cost of
Speaker 2: building that kind of infrastructure in the UK in real time.
Speaker 2: And by the way, trams to new Haven. If you
Speaker 2: are listening, please, with the love of God, come and
Speaker 2: pick up the rest of the rubbish. It's not finished yet.
Speaker 2: I'm going to stop there because if I keep reading
Speaker 2: for all these lists, I'm going to get myself terribly upset.
Speaker 2: So here we are. We have this this problem, and
Speaker 2: as you say, they're not disconnected observations. They highlight our
Speaker 2: real problem. What you diagnos is our real problem. We
Speaker 2: can't build anything. And now I'm going to hand in
Speaker 2: for you. Is it really that simple? We can't build
Speaker 2: anything and that's destroying our economy.
Speaker 3: Yeah, I think it is that simple. We point to
Speaker 3: France as an example of a country that on first glance,
Speaker 3: gets everything wrong. You know, we all know France has
Speaker 3: incredibly high taxes, it has incredibly high regulation, to the
Speaker 3: point where there's a cliff edge. If you look at
Speaker 3: the size of French companies, French companies are lots with
Speaker 3: forty nine employees, and then there's a huge collapse in
Speaker 3: the number of French companies that have fifty employees, either
Speaker 3: because companies just aren't refusing to grow because so many
Speaker 3: regulations kick in at that point, or because they're effectively
Speaker 3: committing fraud and under reporting the number of employees they have,
Speaker 3: both of which are pretty bad. We know that the
Speaker 3: French public hates any attempt to liberalize its economy. There
Speaker 3: have been riots over raising the retirement age to sixty four.
Speaker 3: I mean, imagine if we were talking about raising the
Speaker 3: retirement age to sixty four in the UK. So, according
Speaker 3: to all those kinds of metrics, and I think almost
Speaker 3: anybody would agree, will hold back an economy, France should
Speaker 3: be doing incredibly badly. But actually France is doing roughly
Speaker 3: as well as we are. By some measures, they're doing
Speaker 3: better than us. I think it's reasonable to say they're
Speaker 3: doing about as well as we are. And the reason
Speaker 3: we think that is is that even though they get
Speaker 3: those things wrong tax regulation things like that, they get
Speaker 3: the basics right. So the footprint of Paris has tripled
Speaker 3: since the Second World War, whereas London has basically not
Speaker 3: grown at all. As you mentioned, they build many, many
Speaker 3: more homes. They have far more homes per person than
Speaker 3: we do with about the same population size. They build
Speaker 3: things like tramways much more cheaply than we do. They
Speaker 3: build much much more high speed rail, much more cheaply
Speaker 3: than we do, and all of those things are related.
Speaker 3: There there's I think big, big misunderstanding or kind of
Speaker 3: gap in the UK between costs and what you actually get.
Speaker 3: So we always talk about, oh, well, you know, we
Speaker 3: should build Hinckley Point C, which I agree with, we
Speaker 3: should build HS two, which I don't agree with, we
Speaker 3: should build crossrail, but never really recognize that the very
Speaker 3: very high costs of those projects mean that we really
Speaker 3: don't get to build more than one. If we get
Speaker 3: that one at all, we should be in a situation
Speaker 3: where we're able to build things like crossrail and other
Speaker 3: metros much more cheaply at the price that for example,
Speaker 3: Madrid built its metro which was less than a quarter
Speaker 3: of the price of crossrail, so that we can have
Speaker 3: more of them.
Speaker 2: So when we.
Speaker 3: Talk about the cost of nuclear power, we're not just
Speaker 3: complaining that we have to pay high prices for it,
Speaker 3: we're complaining that we don't get enough of it, and
Speaker 3: so we don't have anything like the kind of energy
Speaker 3: abundance that we want, and all of this adds up
Speaker 3: to a massive shortfall investment. So the real origin of
Speaker 3: writing this paper was a frustration in the run up
Speaker 3: to and after the election that many commentators were kind
Speaker 3: of finally beginning to catch up with people like new Marin,
Speaker 3: people like me who've been talking about the UK under
Speaker 3: investing for years. But the main conversation sort of thinks
Speaker 3: of investment as this sort of abstract number, as investment
Speaker 3: as measured by how many pounds we're putting into some
Speaker 3: accounts somewhere or spending, when really what we care about
Speaker 3: with investment is what we're getting out of it. How
Speaker 3: many nuclear power plants are we getting, how many miles
Speaker 3: of railway, how many miles of tramline, how many miles
Speaker 3: of road, how many houses are we getting. And so
Speaker 3: the fundamental point that we're making is that we underinvest
Speaker 3: both in terms of costs are so high that it
Speaker 3: wouldn't be economic to put much more money in than
Speaker 3: we do and for the money we do put in,
Speaker 3: we get much less out the stuff that we really
Speaker 3: care about than we should and changing that is really
Speaker 3: in our hands. Very very little of this is a
Speaker 3: technological problem. It's almost all a political problem. And yes,
Speaker 3: politics can be very difficult to fix, but politics should
Speaker 3: be eminently fixable. And the fundamental argument that we make
Speaker 3: is that the UK could be a much more prosperous
Speaker 3: country without any change in technology, without any real change
Speaker 3: in the constituency of the economy. We just need to
Speaker 3: make it much easier to build the dances.
Speaker 2: Let's go back then and talk about the reasons why
Speaker 2: everything costs so much more. Here I mean again, as
Speaker 2: I say, watching the Edinburgh tram in real time and
Speaker 2: watching the costs go up and up and up, and
Speaker 2: comparing the cost per milder tramp projects elsewhere was a
Speaker 2: genuine shoka. Genuine shoka. When you run through the list,
Speaker 2: what of the reasons why the cost is so high?
Speaker 2: What are the main ones?
Speaker 3: The three big things that I would point to are
Speaker 3: number one the planning system. Some people have read the
Speaker 3: paper as just being about the planning system, which isn't true,
Speaker 3: but it's understandable that some people would interpret it that
Speaker 3: way because the planning system that we have is a
Speaker 3: relic of the Athlete government. You know, it's a relic
Speaker 3: of post war socialism in the same way that the
Speaker 3: NHS is, and I think it's similarly dysfunctional, dysfunctional in
Speaker 3: a much more invisible way. So after the Second World War,
Speaker 3: the Athleague government nationalized huge amounts of the economy, including
Speaker 3: the way we use land, and it went from a
Speaker 3: system where even the local council did have the power
Speaker 3: to stop people from building things on their land. They
Speaker 3: had to compensate you if they stopped you from building something,
Speaker 3: so they had an incentive not to just block everything.
Speaker 3: They could block things, but they would have to bear
Speaker 3: some of the cost of blocking, and that meant that
Speaker 3: pre the Second World War we had a much more
Speaker 3: balanced system that allowed lots of things to be built.
Speaker 3: And the nineteen thirties I think really should be famous
Speaker 3: for being the most impressive decade of housebuilding that we
Speaker 3: have ever had, almost entirely private house building.
Speaker 2: And nice houses too, crucially, really nice houses. Really anyone
Speaker 2: would want to live in a thirty's house lovely.
Speaker 3: They're brilliant and much larger than houses that have been
Speaker 3: built after the Second World War very affordable, often with
Speaker 3: a lot of gardens. There was a huge, huge shift
Speaker 3: in the British economy towards building nice, affordable family homes
Speaker 3: in the nineteen thirties. It actually is one of the
Speaker 3: reasons that we were able to avoid the worst effects
Speaker 3: of the Great Depression, the global Great Depression, and one
Speaker 3: of the reasons that we were able to rearm to
Speaker 3: fight the Germans in the Second World War. It was
Speaker 3: really as important as that. And if we were building
Speaker 3: at the same rate today that we built in the
Speaker 3: nineteen thirties, if you adjust for population, we'd be building
Speaker 3: more than half a million homes a year. I mean,
Speaker 3: we talk at the moment as if three hundred thousand
Speaker 3: homes a year is really ambitious, and you know, if
Speaker 3: we're really, really lucky, we might be able to get
Speaker 3: three hundred thousand homes a year. I mean, that's chicken
Speaker 3: feet compared to what we should be building and what
Speaker 3: we have been building as a proportion of the economy
Speaker 3: in the past. So shifting to the Atli government, what
Speaker 3: I would argue is a socialist land use planning system
Speaker 3: was really disastrous and you can see the number of
Speaker 3: houses being built by the private sector collapse after that happens,
Speaker 3: And what also happens is that where homes are built
Speaker 3: becomes much less driven by market signals and prices and
Speaker 3: much more driven by effectively central planning. And that's left
Speaker 3: us with a situation where we don't build enough houses
Speaker 3: every year, and the houses we do build are often
Speaker 3: not anywhere near where people actually want them to be built,
Speaker 3: and the consequence of that is that people can't move
Speaker 3: to where good jobs are. So housing is not just
Speaker 3: a problem of bills. It's not just a problem of
Speaker 3: us having to spend more of our money on rents
Speaker 3: and mortgages than we'd like to. It's also, and I
Speaker 3: would say much more importantly, a problem of what jobs
Speaker 3: people can do and where.
Speaker 2: And one of the things you say about that, let's
Speaker 2: won't go back quickly. One of the things you say
Speaker 2: about that is a major problem in London being the
Speaker 2: lack of a middle income group. Only the very rich
Speaker 2: and the very poor eleven social housing can afford to
Speaker 2: live in London, which means that you know, if you're
Speaker 2: a young or quite young person, you should, under normal circumstances,
Speaker 2: be drawn to the city to enter productive work you want.
Speaker 3: Yeah, I mean during the during the Industrial Revolution, towns
Speaker 3: of ten thousand people grew by more than ten times
Speaker 3: in less than a century. I mean some towns, some
Speaker 3: cities that we now think of as being great cities
Speaker 3: like Sheffield went from being almost nothing at the beginning
Speaker 3: of the Industrial Revolution to centers of world commerce and
Speaker 3: world industry by the end of the nineteenth century. We
Speaker 3: haven't had anything like that kind of ability to move
Speaker 3: around and to migrate internally according to economic changes and
Speaker 3: changes in economic reality, and I think that's one of
Speaker 3: the really big reasons that we have been held back
Speaker 3: in our ability to grow. And you're absolutely right. You know,
Speaker 3: there are some places in London inner London boroughs that
Speaker 3: have thirty to forty percent of the housing being assigned
Speaker 3: to social housing, and that means that a lot of
Speaker 3: the most valuable, most central housing stock is occupied by
Speaker 3: people who are often not in work at all. If
Speaker 3: they are in work, they're often in fairly low productivity jobs,
Speaker 3: and they're occupying homes that could be occupied by people
Speaker 3: who could be far more economically productive and grow and
Speaker 3: drive economic growth much more. The result, as you've mentioned,
Speaker 3: is this kind of missing middle where if you want
Speaker 3: to live in kind of inner London, by which I
Speaker 3: mean sort of zones three, two and one, you either
Speaker 3: have to be very rich or very poor. Nobody in
Speaker 3: the middle can really afford to live in central London
Speaker 3: because they can't get into social housing and they cannot
Speaker 3: afford private housing. I think that's a disaster. I think
Speaker 3: socially and economically that's a disaster. And what's so frustrating
Speaker 3: about it is that fixing that problem is really really simple.
Speaker 3: London is one of the least dense major cities in
Speaker 3: Western Europe. The nicest parts of London, places like Bloomsbury Belgravia,
Speaker 3: are the densest part of London. You know, density doesn't
Speaker 3: have to mean towers in the park. Density can mean
Speaker 3: six story, eight story Jordan Edwardian terraces and building more
Speaker 3: beautiful and livable housing like that would allow us to
Speaker 3: allow many, many millions more people to move into London,
Speaker 3: get better jobs, start more companies with each other, and
Speaker 3: I think produce huge amounts of extra output and we're
Speaker 3: just not doing it. And I think fixing that would
Speaker 3: be a tremendously easy way to drive a lot of
Speaker 3: economic growth, and to just get a lot of output
Speaker 3: just building those homes would be a lot of economic
Speaker 3: activity and a lot of economic outputs that we could
Speaker 3: have tomorrow. We could begin working on that tomorrow if
Speaker 3: we want such.
Speaker 2: Planning isn't just about houses. It's about transport and all
Speaker 2: the other infrastructure that we need, and there we have
Speaker 2: a major problem as well, don't we.
Speaker 3: Absolutely. I mean, the example that I find most frustrating
Speaker 3: is this tunnel called the Lower Thames Crossing, which is
Speaker 3: being built, or at least being proposed to be built
Speaker 3: under the Thames to link up Kent and Essex. And
Speaker 3: this will also link up England's two busiest seaports, so
Speaker 3: there's a very obvious economic need for this. Now, the
Speaker 3: planning application for this alone has run to three hundred
Speaker 3: and sixty thousand pages and cost two hundred and ninety
Speaker 3: seven million pounds, which for context, is twice what it
Speaker 3: costs the Norwegians to actually build the world's longest tunnel.
Speaker 2: Okay, we now we need to reread that. The planning
Speaker 2: documentation for the Lower Thames Crossing, which as you've just said,
Speaker 2: is incredibly important, three hundred and sixty thousand pages going
Speaker 2: on three hundred million so far. I'm going to repeat
Speaker 2: this because it's so important. That is more than twice
Speaker 2: as much as it costs Norway to actually build the
Speaker 2: longest road tunnel in the world. We have spent more
Speaker 2: on planning, double as much on planning alone than Norway
Speaker 2: has spent on building something similar. That is off the scale. Shocking,
Speaker 2: isn't it.
Speaker 3: It's astonishing And it's one of those figures that you
Speaker 3: have to read it and you have to check it,
Speaker 3: you know, you please. I encourage people who are sort
Speaker 3: of rolling their eyes in this belief check the sources, please,
Speaker 3: because it's so unbelievable and far fetched that it feels
Speaker 3: like no reasonable person could possibly have allowed the system
Speaker 3: to get this way. But it isn't just planning in
Speaker 3: the case of infrastructure. It isn't just planning in the
Speaker 3: case of housing either, but it's primarily planning for housing.
Speaker 3: There are environmental assessments that slow down projects enormously cost
Speaker 3: huge amount of money. To reopen a three mile train
Speaker 3: trap between Bristol and Porto's Head, there is an eighteen
Speaker 3: thousand page environmental assessment that cost thirty two million pounds
Speaker 3: and to put that into context. The Jubilee Line extension
Speaker 3: in the early nineteen nineties had a four hundred page
Speaker 3: environmental assessment. So this is a recent phenomenon. This is
Speaker 3: a new development that we are requiring environmental assessments like
Speaker 3: this and of this cost and of this time, and
Speaker 3: it's one of the really really major reasons we have
Speaker 3: other Some people would call them checks. I would call
Speaker 3: them hugead roadblocks to building things. Something called the Aarhus Convention,
Speaker 3: which is an international convention that the UK as a
Speaker 3: signatory to, which caps the cost of legal challenges to
Speaker 3: infrastructure projects. So if you are a even if you lose,
Speaker 3: so if you are a vexatious claimant you don't want
Speaker 3: a tunnel being built near you, you can sue or
Speaker 3: you can judicially review the project, and even if you lose,
Speaker 3: the costs that you will have to pay to cover
Speaker 3: the winners' costs are capped at between five and ten pounds,
Speaker 3: so trivial, trivial amount of money. And this is something
Speaker 3: that we have made stricter in the last seven or
Speaker 3: eight years. But Theresa May government actually made this stricter
Speaker 3: unbelievably and what we've created is a situation where legal
Speaker 3: challenges to infrastructure are very easy and very cheap. There
Speaker 3: are huge numbers of triggers for judicial reviews, there is
Speaker 3: huge compliance cost with the planning system and the environmental
Speaker 3: assessment system. And then on top of all of that,
Speaker 3: the way that we pay for major infrastructure projects in
Speaker 3: the UK has moved from being something that was devolved
Speaker 3: and was either done by a private company as in
Speaker 3: the case of most of our railroads, or by local
Speaker 3: authority as in the case of many roads and tramways
Speaker 3: during the era of the tram to a situation where
Speaker 3: national government pays for things and oversees major projects, and
Speaker 3: almost nobody in that project has an incentive to keep
Speaker 3: costs down. And I think this is the real problem
Speaker 3: that HS two had, where basically nobody in the decision
Speaker 3: making pipeline had any incentive to keep costs down for
Speaker 3: HS two and that includes the cost of appeasing objectives,
Speaker 3: you know. I think there probably does need to be
Speaker 3: some appeasement nim of Nimbi's in some cases for political reasons,
Speaker 3: but there has to be a counter a counterweight to
Speaker 3: that that says, if you appease these people too much,
Speaker 3: and if you spend you know, billions of pounds on
Speaker 3: unnecessarily tunneling loads and loads of miles of this line.
Speaker 3: A quarter of HS two is supposed to be tunneled
Speaker 3: to basically avoid NIMBIA complaints. Then you're going to go bankrupt,
Speaker 3: you know, or the project is not going to happen,
Speaker 3: or you will get fired, or your voters will vote
Speaker 3: you out. And we have very few of those mechanisms
Speaker 3: in place now for these projects. The only real mechanism
Speaker 3: that we have is the Treasury coming in and saying, okay,
Speaker 3: you know what, Actually, you spend too much money on this,
Speaker 3: We're canceling this, or we're going to cancel some of this,
Speaker 3: which is a very blunt to cancel.
Speaker 2: Are awful, that's not the correct incentive. Spend too much
Speaker 2: and we don't do it. Not norful.
Speaker 3: Absolutely, we don't want a situation where the only two
Speaker 3: options are extremely expensive infrastructure or canceled infrastructure. We want
Speaker 3: there to be incentives. And you know, anybody who's worked
Speaker 3: for any kind of on any kind of complex project
Speaker 3: knows you need people at every step of the decision
Speaker 3: making chain to be worried about costs. There is all
Speaker 3: always going to be cost inflation, and you need people
Speaker 3: with strong incentives to keep the costs down to make
Speaker 3: decisions that say, you know, this isn't going to be
Speaker 3: the fastest ty speed rail line in the world. This
Speaker 3: is going to be the second fastest or of the
Speaker 3: fifth fastest. You know, it's going to be a lot
Speaker 3: better than what we've got, but it's going to be
Speaker 3: not by it's not going to be gold plated. And unfortunately,
Speaker 3: we just don't do that. So all of the problems
Speaker 3: that we have with environmental assessments and with planning and
Speaker 3: judicial reviews and stuff like that are compounded by the
Speaker 3: fact that the incentives for the people who are actually
Speaker 3: running the project don't factor costs in at all, really,
Speaker 3: and I think that's the kind of underlying reason that
Speaker 3: cost disease has grown so badly in infrastructure and things
Speaker 3: like nuclear power as well, but infrastructure especially, And again,
Speaker 3: we can change that. You know, we can evolve decision
Speaker 3: making to people who are more accountable for the decisions
Speaker 3: they make and who can go bankrupt, and we can
Speaker 3: bring a more involved role for the private sector that
Speaker 3: includes loss as well as profit. I think a huge,
Speaker 3: huge problem that we've got is when we do these
Speaker 3: sort of quasi private projects. There is still the kind
Speaker 3: of government, a funder of last resorts that that insulates
Speaker 3: the private sector from its cost increases. And we can
Speaker 3: change that, but it will be challenging and it's not
Speaker 3: straightforward to get there from where we are.
Speaker 2: Let's go back to nuclear energy that you just mentioned.
Speaker 2: I mean, one of the really horrifying things happening in
Speaker 2: the UK at the moment, in over the last decade
Speaker 2: is this extremely fast rise in the cost and the
Speaker 2: cost of electricity, and that you know, that's just a
Speaker 2: destroyer of industry, isn't it, given that you know, like
Speaker 2: economic activity is energy transformed one way or another. The
Speaker 2: how you make the price of energy, the less likely
Speaker 2: you are to get very much out of the other end.
Speaker 2: Now we're supposed to be living in a world, we
Speaker 2: keep being told with living in a world where our
Speaker 2: huge investment into the renewable industry will make our electricity
Speaker 2: cheaper and cheaper and everything's going to be absolutely marvelous.
Speaker 2: That's not happening.
Speaker 3: Yeah. I have to say I actually went into this
Speaker 3: paper feeling much more optimistic about intermittent renewables, wind and
Speaker 3: solar than I do now, and in the process of
Speaker 3: research and writing and speaking to people who are working
Speaker 3: in this sector, I have come away with the sense
Speaker 3: that really we are doomed if we think that wind
Speaker 3: and solar are going to save us. And I think
Speaker 3: part of this is because solar does seem very promising
Speaker 3: in some parts of the world. You know, the cost
Speaker 3: of photovoltaic solar cells is collapsing. You know, we're getting
Speaker 3: to a point where solar cells, I mean, they're not
Speaker 3: going to be quite free, but they're going to be
Speaker 3: something approximating free. The problem is that you also need
Speaker 3: storage in a place like the UK where we get very,
Speaker 3: very overcast, whether as everybody knows, I mean possibly people
Speaker 3: listening to this right now are listening to it in
Speaker 3: a very overcast This is the this is the time,
Speaker 3: the time of the year where solar is really not
Speaker 3: very good. But you know, in south in the southwest
Speaker 3: of the United States, in Spain, in North Africa, solar
Speaker 3: may be very very problem. The trouble is it's just
Speaker 3: not going to work here. It may have some role
Speaker 3: to play, but we just cannot expect the base load
Speaker 3: energy that we need, the base electricity production that we
Speaker 3: need to come from solar and wind is just not
Speaker 3: seeing anything like the kind of cost reductions that solar
Speaker 3: is see.
Speaker 2: Well, you talked about there being a system level cost
Speaker 2: that people don't really think of, and there are all
Speaker 2: things actually that we've talked about on this pod before.
Speaker 2: The need for transmission lines to connect generation to households
Speaker 2: and industry. And in the old days, you had a
Speaker 2: few large power stations, and the transmission network simply connected
Speaker 2: those large power stations to the communities where the power
Speaker 2: was needed. But now if you have the power being
Speaker 2: developed in loads and loads of remote places all over
Speaker 2: the country, you have a very very different setup. And
Speaker 2: there's that cost, and then there's the costs of the
Speaker 2: grid balancing where you have to match up this intermittent
Speaker 2: energy with the needs. And then of course there's the
Speaker 2: cost of backup capacity. These are the three things that
Speaker 2: you list, and all these things are not necessarily always
Speaker 2: included when we look at the cost of renewals, and
Speaker 2: if you do include them, you get slightly differ pature.
Speaker 2: Is that fair?
Speaker 3: Huge? Yeah, and completely, And I think the mistake that
Speaker 3: some people make is looking at wholesale costs, which are
Speaker 3: only about thirty percent of final bills. Incidentally, wholesale costs
Speaker 3: are really a significant but not overwhelming fraction of what
Speaker 3: we pay for when we pay for electricity. The rest
Speaker 3: is these kinds of system level costs, and what we're
Speaker 3: doing with renewables and really with nuclear as well, is
Speaker 3: moving from a world where marginal wholesale costs are the
Speaker 3: most important thing to worry about, which is the case
Speaker 3: with gas, which is the case with coal, which is
Speaker 3: the case with oil, to a world where fixed costs
Speaker 3: are things that we really care about. You know, the
Speaker 3: marginal cost of a wind turbine is very low, totally agree,
Speaker 3: But the fixed cost of a wind turbine, once you
Speaker 3: include all of the system level costs you're talking about,
Speaker 3: isn't quite high. And once you include the need to
Speaker 3: produce electricity when the wind isn't blowing, and produce electricity
Speaker 3: and travel transport electricity from where the wind turbine is
Speaker 3: to where people actually need it, then the costs become
Speaker 3: quite significant. And I think that's the way that we
Speaker 3: make sense of this apparent paradox where we've been moving
Speaker 3: from a world where you know, where we've been building
Speaker 3: lots and lots of renewables, which you know do indeed
Speaker 3: have very very low the wholesale costs when they're producing energy,
Speaker 3: but we have to pay for them to have been
Speaker 3: set up in the first place. You know, we have
Speaker 3: talked about the environmental levees, things like the renewables obligation
Speaker 3: contracts for difference, these are the contracts and subsidies that
Speaker 3: are explicit that we have set up to support renewables,
Speaker 3: and they are important. You know. They now exceed ten
Speaker 3: billion pounds a year, but they're not anywhere near the
Speaker 3: whole story. And even if we weren't on the hook
Speaker 3: for those, the cost of renewables I think would still
Speaker 3: be prohibitive. At the beginning of November, the energy mix
Speaker 3: for the first week was majority gas. And this is
Speaker 3: in a context where we've already built decades. We've already
Speaker 3: built more of a wind and solar for more than
Speaker 3: a decade. We are supposed to be able to move
Speaker 3: to a decarbonized electricity grid, or the government's aim is
Speaker 3: to move to a decarbonized electricity grid by the end
Speaker 3: of the decade. I just do not believe that that
Speaker 3: is possible with wind and solar, and if I'm wrong,
Speaker 3: please you know, I very much hope my role that
Speaker 3: I just don't think that that's going to happen. Think
Speaker 3: the thing that we point to, and that the event
Speaker 3: that we point to that is a model that we
Speaker 3: may be able to follow is France's nuclear roller in
Speaker 3: the nineteen seventies and the nineteen eighties, which was state led.
Speaker 3: Probably wasn't the way I would have favored it at
Speaker 3: the time, and I would hope that we could do
Speaker 3: a non state leaded version of it, but managed to
Speaker 3: decarbonize the French economy far far earlier than or decarbonize
Speaker 3: the French electricity grid at least far far earlier than
Speaker 3: any other Western European country, and did so without really
Speaker 3: having decarbonization in mind. And now that the rest of
Speaker 3: Western Europe is I think trying to decarbonize the wrong
Speaker 3: way with intermittent renewabals rather than nuclear. France has become
Speaker 3: quite an important energy exporter. We are quite reliant on
Speaker 3: French nuclear energy when the windows are blowing and when
Speaker 3: the sun isn't shining. I think that it would be
Speaker 3: a mistake to continue that state of affairs, and I
Speaker 3: think nuclear is a clean form of electricity that we
Speaker 3: should be looking to the problem is that it's so expensive.
Speaker 3: The problem is that we are building nuclear power plants
Speaker 3: for vastly more than even Winden solar cost us.
Speaker 2: And it doesn't have that expensive does it. I mean,
Speaker 2: one of the numbers that I keep killing out is
Speaker 2: that I saw somewhere and you can tell me if
Speaker 2: this is correct or not, that we made seven thousand,
Speaker 2: seven thousand design adjustments to the Hinkley plant against the
Speaker 2: design that I think work perfetly well in France, and
Speaker 2: each one of those adjustments comes with cost absolutely.
Speaker 3: I mean, my favorite cost is the underwater megaphone to
Speaker 3: scare away fish from the kind of cooling system the
Speaker 3: reactor at Hinkley Point C needs to draw in seawater
Speaker 3: to cool itself down, and some fish would be killed
Speaker 3: in the process, not in any way that would be
Speaker 3: dangerous to the reactor, but just some fish should be
Speaker 3: I think, sucked into a grid and killed. And some
Speaker 3: of these fish, you know, a few hundred of these
Speaker 3: fish would be from rare and protected species, and so
Speaker 3: the reactor, the EDF was instructed to come up with
Speaker 3: a way to stop these fish from being sucked in.
Speaker 3: Their solution was to build an underwater megaphone. That would
Speaker 3: play loud noises that would scare fish away. And amazingly,
Speaker 3: doing this will actually increase the risk to human life
Speaker 3: of the reactor because the megaphone has to be maintained
Speaker 3: by divers who undertake some risk in doing this. So
Speaker 3: in order to protect fish, we have not just increased
Speaker 3: the cost to the project, we've actually increased the danger
Speaker 3: to human life. And again this is really for a
Speaker 3: few hundred fish.
Speaker 2: Of this we know what that costs per fish in
Speaker 2: terms of protection.
Speaker 3: I don't know off the top of my head what
Speaker 3: that costs. I'm not sure the number is actually public
Speaker 3: for how much this particular adjustment costs.
Speaker 2: So I'm not sure if we don't anyone, If anyone
Speaker 2: knows the value that the UK state places on the
Speaker 2: life of every fish, please do right in and let
Speaker 2: us know.
Speaker 3: But I mean, it is really extraordinary if you look
Speaker 3: at what we built nuclear for in the eighties and
Speaker 3: as late as the nineteen nineties, we built Size Well
Speaker 3: B for about well less than half the price that
Speaker 3: we're building Hintley points C for and about two thirds
Speaker 3: of the price that we are estimated to build Size
Speaker 3: Well SEE. Although I will confidently predict that size. Well, see,
Speaker 3: will increase in costs once we start building it for things,
Speaker 3: for the reasons that we're talking about that there is
Speaker 3: no final decision on a project like nuclear. You keep
Speaker 3: having to go back, you keep having to make adjustments,
Speaker 3: you keep having to do compliance and kind of this
Speaker 3: dance with the regulator and with the environmental the environmental regulator,
Speaker 3: and it means that costs just drive up and up
Speaker 3: and up and up. Now we know both from history
Speaker 3: and from international examples that it doesn't have to be
Speaker 3: this way. South Korea builds nuclear reactors for about a
Speaker 3: quarter of the price that we build them in South Korea,
Speaker 3: and it has committed to building new reactors in the
Speaker 3: Czech Republic for about half the price that we're building.
Speaker 3: So a very simple solution would be to contract with
Speaker 3: the South Korean Energy Authority KEEPCO to do this for us.
Speaker 3: I think a more exciting approach, you know, I think
Speaker 3: we should probably do that. I think a more exciting approach,
Speaker 3: but actually just fixing our regulation to rebuild the UK
Speaker 3: nuclear industry, which could be world leading. You know, there's
Speaker 3: no reason that we should have to resort to South
Speaker 3: Career to build our nuclear reactors. We have built many,
Speaker 3: many good nuclear reactors. We built the world's first nuclear
Speaker 3: reactor and by the by as late as the nineteen sixties,
Speaker 3: we had more nuclear reactors than the rest of the
Speaker 3: world put together. Or you know, in existence in Sheffield
Speaker 3: is a company that builds some of the effectively a
Speaker 3: world leading nuclear reactor casing company that's still operating, still exporting.
Speaker 3: It's you know, it's a company that not many people
Speaker 3: know about, but is something that I think we should
Speaker 3: be quite proud of. We should be reviving that kind
Speaker 3: of industry by making it much easier to build, making
Speaker 3: it much more certain to build, and ultimately making it
Speaker 3: much cheaper to build. And it will have the double
Speaker 3: benefit of yes, we'll be able to provide the nuclear industry.
Speaker 3: Yes we'll be able to build the low carbon energy
Speaker 3: that we need for an actually affordable price. And actually
Speaker 3: a triple benefit is that in getting much cheaper electricity,
Speaker 3: other English, other English industry, British industry will be able
Speaker 3: to come back. So we know the industry is incredibly
Speaker 3: sensitive to the price of electricity. It's obvious that it
Speaker 3: will be and as we decarbonize, we're going to get
Speaker 3: more and more dependent on the price of electricity being
Speaker 3: low to have industry. I think it's quite important that
Speaker 3: we do that. And I think that whatever discussions and
Speaker 3: debates people want to have about industrial policy, and that's great,
Speaker 3: but the best industrial policy in the world is not
Speaker 3: going to work for you if you don't have electricity
Speaker 3: costs that are competitive with South Korea, competitive with China,
Speaker 3: competitive with India, and right now we are way way
Speaker 3: way above them.
Speaker 2: Okay, let's talk about optimism. Should we try that? You
Speaker 2: try that, Let's do it. And one of the things
Speaker 2: that you stress in your importance I think is very
Speaker 2: valuable is that the value of the UK's institutions are
Speaker 2: you know, our legal system, our parliamentary system, all these
Speaker 2: things that we have that are still reasonably solid that
Speaker 2: we still believe in. And of course we have our
Speaker 2: amazing financial industry. We have English which we can't dismiss,
Speaker 2: and we have a a great time zone, we have
Speaker 2: some wonderful advantages. We have very solid base right that
Speaker 2: still exists, not going anywhere. What you're feeling about fixing
Speaker 2: the rest, I mean our most recent budget. Flicking through
Speaker 2: it and looking at it, I'm not entirely sure that
Speaker 2: Rachel reeves had read your essay quite as carefully as
Speaker 2: the rest of us.
Speaker 3: Well. I the reason that I am optimistic, I think
Speaker 3: there are two main reasons. One is that things really
Speaker 3: are getting very very bad things. Really every year that
Speaker 3: goes by that we don't see not just normal growth.
Speaker 3: I mean, we've had so much stagnation since the mid
Speaker 3: two thousands that we should be seeing quite rapid catch
Speaker 3: up growth, both catching up with the US the kind
Speaker 3: of economic frontier, and just catching up with the trend,
Speaker 3: catching up with what we look like we should have
Speaker 3: been we should have been on for prior to the
Speaker 3: late mid two thousands. So every year that goes by
Speaker 3: that we experience stagnation, I think it becomes harder and
Speaker 3: harder to deny that we have a really, really big problem.
Speaker 3: And I think people do recognize, and the response to
Speaker 3: this paper I think shows that people really do recognize
Speaker 3: that the big problem is that we're just more building things.
Speaker 3: We're not allowing things to be built. You know, the
Speaker 3: price of a house in London is very very high.
Speaker 3: There is a huge amount of demand to live in
Speaker 3: somewhere like London, Oxford, Cambridge. It isn't that there isn't demand.
Speaker 3: If if it was really cheap to live in London
Speaker 3: and we would still stagnating, then I'd be worried because
Speaker 3: I would think that we may have nothing going for us.
Speaker 3: You know, we may be trying to jump start an
Speaker 3: entire economy here. Really we're just trying to meet demand
Speaker 3: that is already there. So that's one reason I think
Speaker 3: people are becoming more and more aware of the problem.
Speaker 3: The second reason is that a lot of the time,
Speaker 3: the answer, I think is giving more control at a
Speaker 3: much more local level and taking control away from national
Speaker 3: level quangos and national level kind of independent agencies that
Speaker 3: we've set up, I think in a quite a misguided
Speaker 3: way to try to fix problems, in my opinion, are
Speaker 3: not really the big problems that we've got. So I
Speaker 3: think that, for example, if local councils could make decisions
Speaker 3: about nuclear power permitting rather than the environmental agency, rather
Speaker 3: than the rather than the amount of involvement that the
Speaker 3: nuclear regulator has. We should be checking for safety. We
Speaker 3: should be checking to make sure that the nuclear reactor
Speaker 3: is safe, but we shouldn't be worried about whether the
Speaker 3: nuclear reactor is going to kill a few.
Speaker 2: Fish or ruin someone's view, yeah, And.
Speaker 3: The reason that we should be optimistic is that local
Speaker 3: councils should have a really strong incentive to allow things
Speaker 3: like that to be built in their areas because they
Speaker 3: bring jobs, they've bring built business rates, payments. There are
Speaker 3: all sorts of reasons that you should want these things
Speaker 3: to be built in your area. And historically it was
Speaker 3: the case that you would want these things to be
Speaker 3: built in these in your area. It's a fairly recent phenomenon.
Speaker 3: It's a post war phenomenon that local councils do not
Speaker 3: want prisons in their area. They don't want the kinds
Speaker 3: of infrastructure that the country wants because we do not
Speaker 3: allow them to retain the business rates that those projects
Speaker 3: used to pay. Fixing that I think should be quite easy.
Speaker 3: And once we fix that kind of incentive, and you know,
Speaker 3: I mentioned earlier local councils used to have a really
Speaker 3: strong incentive to not block development because they would have
Speaker 3: to pay for it. I think that's what kind of
Speaker 3: mechanism we want to go back to, and we want
Speaker 3: to give them incentives to allow development. And I think
Speaker 3: once we do that, combined with devolving decision making to
Speaker 3: that kind of level, we will fix a lot of
Speaker 3: the incentives problems that exists. I think it's quite striking
Speaker 3: that during the era of the tram in the UK,
Speaker 3: when you know, we had the first major tramways in
Speaker 3: many cities, we had the first overhead tramway and lead
Speaker 3: overhead powered tramway and leads. Many of these tramways were
Speaker 3: not run by private companies. They were run by the
Speaker 3: local authority for profit and they were used by the
Speaker 3: local authority to generate money that they could then spend
Speaker 3: on other projects. I think we have a pretty good
Speaker 3: tradition here that local government can actually allow things to
Speaker 3: be built and build things themselves if we give them
Speaker 3: the right incentives to do so. So I'm quite optimistic
Speaker 3: about that, I think kind of Secondly, the other thing
Speaker 3: that we should be doing is giving Parliament much more
Speaker 3: power over national level projects that get built. Again, historically,
Speaker 3: when we built railways in the nineteenth century and right
Speaker 3: up until the Second World War, I believe it wasn't
Speaker 3: an independent quango that made the decision about what got built.
Speaker 3: It would be a private operator would have a proposal.
Speaker 3: They would say, you know, we want to build this
Speaker 3: railway from here to there. They would bring it to
Speaker 3: a select committee in Parliament. The select committee would make
Speaker 3: a decision. They would then pass a build that would
Speaker 3: protect the project from vexatious lawsuits and things like that,
Speaker 3: and it would get built and you have a privately
Speaker 3: owned operatives and managed railway. I think there is a
Speaker 3: lot of infrastructure that could be built by that mechanism.
Speaker 3: It would be it would bring power over these kinds
Speaker 3: of projects back to democratic decision makers, away from I think,
Speaker 3: very very badly incentivized kind of independent bureaucrats. And that's
Speaker 3: the kind of underlying change we need to the country
Speaker 3: that I think probably could happen. It certainly won't be easy,
Speaker 3: and it certainly will be quite a significant change in
Speaker 3: the way we do things, but it would be going
Speaker 3: back to the way we did things when things worked
Speaker 3: really well and when we build block things in this country.
Speaker 3: So it's possible. I think there's a growing demand for it,
Speaker 3: and I think what's really optimistic about it is that
Speaker 3: it works with the grain of the history of British
Speaker 3: democracy rather than against them.
Speaker 2: I agree with you. The only thing I'm concerned about
Speaker 2: is that I'm not sure that I'm seeing in this
Speaker 2: government and appetite for understanding that appetite for decentralizing and
Speaker 2: appetite for moving away from x non democratic quang goes
Speaker 2: back to parliament and appetite for sending power back to councils.
Speaker 2: And I don't see that. I've fascinated to know that
Speaker 2: you do.
Speaker 3: I don't see it in this government. I have to admit.
Speaker 3: I think that it may be that this government fills
Speaker 3: the need for growth such that it just does the
Speaker 3: kind of nuclear option of calling in projects centrally approving
Speaker 3: them and just making them happen. You know, they've done
Speaker 3: this with a few renewables projects. I don't yet have
Speaker 3: a sense that they're going to do this for things
Speaker 3: like nuclear, but they might. I think that they have
Speaker 3: nailed their colors to the mass of growth so much
Speaker 3: that they need growth kind of politically they are they
Speaker 3: are going to be kind of humiliated if they don't
Speaker 3: get growth. And fiscally, you know, it's looking increasingly likely
Speaker 3: that the tax the tax rises that were in the
Speaker 3: budgets are not going to deliver the kinds of revenues
Speaker 3: that were expected or were hoped for, which means that
Speaker 3: they really really need growth. Both from a fiscal point
Speaker 3: of view, and the political point of view. So you know,
Speaker 3: stranger things will have happened than a government like this
Speaker 3: realizing that it needs to be quite bold. I don't
Speaker 3: think they're going to do the huge constitutional changes that
Speaker 3: I would love, and you know, I think we have
Speaker 3: to wait for a future government to do that. But
Speaker 3: in the meantime I could see this government just saying, look,
Speaker 3: we need houses to get built. We're going to upseone
Speaker 3: parts of London, or we're going to do the Cambridge
Speaker 3: Extension to build an extra quarter of a million homes
Speaker 3: in Cambridge, whatever it might be. I'm not super optimistic
Speaker 3: about that. But gravity is a powerful for us and
Speaker 3: it's not one that this government can bum.
Speaker 2: When we talk about productivity, which you've done quite a
Speaker 2: lot of the lat half an hour. So one of
Speaker 2: the things that we haven't talked about is the public sector.
Speaker 2: And again it's not something that's been addressed by this
Speaker 2: government so far, although obviously we have hopes, not high hopes,
Speaker 2: but hopes that it will be addressed. Is there anything
Speaker 2: you haven't You didn't really write about this and this report,
Speaker 2: but is there anything you feel we can really do there?
Speaker 2: And one of the shocking things when you look at
Speaker 2: the numbers, is productivity having literally barely budged in the
Speaker 2: public sector of a multi decade period, despite the extraordinary
Speaker 2: technological games the rest of us have made over that period.
Speaker 2: Can you see I'm pulling here back to your optimism.
Speaker 2: What can you see you happening there?
Speaker 3: I so the optimist in me says that the money
Speaker 3: that has been assigned to the NHS is going to
Speaker 3: be used to kind of grease the wheels of reform.
Speaker 3: If I am, if I'm optimistic, then then that's what
Speaker 3: they're doing. I don't think we have any reason to
Speaker 3: think that that what you do, but you know, maybe
Speaker 3: maybe they will do.
Speaker 2: Between optimism and delusion, you.
Speaker 3: Know, well, and I'm not saying that is what's going
Speaker 3: to happen. I'm saying it's plausible that that's the plan.
Speaker 3: I think the alternative, much less optimistic reading, is that
Speaker 3: they're making the same mistake that the List Trust government
Speaker 3: made of doing the kind of fun bit first. In
Speaker 3: the Trust's case, it was tag cuts. In this government's case,
Speaker 3: it's spending money on public services and talking about, oh,
Speaker 3: we'll do the supply side reforms later, rather than I think,
Speaker 3: you know, taking your medicine of the supply side reforms,
Speaker 3: getting a bit of growth, getting some sign that they're working,
Speaker 3: and then rewarding yourself or rewarding your clients with more
Speaker 3: money or with task cuts or whatever you want to do.
Speaker 3: That's my kind of pessimistic take on what they're going
Speaker 3: to do. I don't have a huge amount of insight
Speaker 3: into what they're planning, so I don't know what they're
Speaker 3: doing there. I think that public services do not seem
Speaker 3: as if they are a high priority for reform from
Speaker 3: this government. The thing that really worries me is that
Speaker 3: I think that labor came into power thinking that the
Speaker 3: reason the Conservatives failed was that they didn't know how
Speaker 3: to use the civil service quote unquote. This was a
Speaker 3: thing that I just kept hearing of the Tories saying
Speaker 3: that they just don't know how to use the civil service,
Speaker 3: and we know how to use the civil service. And
Speaker 3: they went in They seemingly didn't have particularly well developed
Speaker 3: plans about what they actually wanted to do in government,
Speaker 3: and I think they expected that the civil service would
Speaker 3: tell them what they needed to do, which is a
Speaker 3: really a civil services job. You know, a civil service
Speaker 3: can advise you on various parameters that you that you
Speaker 3: set for it, but they're not there to tell you, well,
Speaker 3: you must build one point five million homes and this
Speaker 3: is how you're going to do it, and that's your
Speaker 3: job's that's why we elect a government. So I think
Speaker 3: the initial signs are that they don't seem to be
Speaker 3: aware of how much reform the civil service needs and
Speaker 3: public services more broadly quite the opposite. But it may
Speaker 3: be that their experience of this and you know, they
Speaker 3: have five years, so I've got they've got quite a
Speaker 3: bit of time sort of wakes them up to how
Speaker 3: much needs to change in terms of the British state.
Speaker 3: And again, would I bet on it, No, I probably wouldn't.
Speaker 3: I think the main reason to be optimistic about the
Speaker 3: UK economy over the next few years is that labor
Speaker 3: may need to do supply cyber reforms just to get growth.
Speaker 3: I don't think they're going to do very much on
Speaker 3: public services. They certainly don't seem to at the moment
Speaker 3: want to do a public service reform, except maybe in
Speaker 3: the NH. Yes, But like I say, five years is
Speaker 3: a long time and it's hard to buck gravity's if
Speaker 3: they keep putting more money into public services. They keep
Speaker 3: giving pay rises to public sector workers and they still
Speaker 3: aren't delivering improvements in service and in results. Then they
Speaker 3: may have no choice but to demand reform and to
Speaker 3: do this. But I don't think I will put money
Speaker 3: on it.
Speaker 2: Well, we'll worry about riding out the private sector on
Speaker 2: another podcast perhaps, But as we always say when we
Speaker 2: discuss these things, our favorite Adam Smith quote, there was
Speaker 2: a lot of ruin in a nation. Hopefully everything will
Speaker 2: be fine. Sam, Thank you so much for joining us today,
Speaker 2: Thanks for having me, Thanks for listening to this week's
Speaker 2: Merin Talks Money. If you like us, show, rate, review,
Speaker 2: and subscribe wherever you listen to podcasts, and keep sending
Speaker 2: questions or comments that Merin Money at Bloomberg dot net.
Speaker 2: Remember you may know more about some of these things
Speaker 2: than we do. Let us know. You can also follow
Speaker 2: me and John on Twitter or x I'm at mariners
Speaker 2: w and John is John Underscore s Epic. This episode
Speaker 2: was hosted by Me marin Somerset Web. It was produced
Speaker 2: by Someasadi, production support by Moses and and special thanks
Speaker 2: to Sam Bowman.