Fuel Duty and Interest Rates

[danieldwilliam]

Here follows a thinly veiled rant about fuel prices.

 

I am sorry that fuel prices are going up. I wish we could all enjoy cheap, abundent energy without killing each other over it or destroying the planet. I also wish we could enjoy a wide range of high quality public services and reduce out tax bill.

 

Currently, the two problems are proving intractable. Don’t worry too much about it, I’m working on them and I’ll deliver a solution just as soon as I can.

 

In the meantime.

 

If you live in the country and drive a car, tough.

 

If you live in the country you have voluntarily taken on the risk of higher fuel prices. You did this in exchange for a) a way of living that suited you better than living in an urban set up, b) cheaper housing costs and therefore lower capital outlays, reduced interest payments and a reduced exposure to the risk of interest rate rises.

 

I chose to live in the centre of Edinburgh and I can walk to work, to the shops, to my son’s nursery. I have relatively little direct exposure to fuel prices. I paid extra for my flat. I have taken on an exposure to interest rates. I want to live in the city and avoid the risks of country living.

 

When interest rates go up will country dwellers demand that I receive a mortgage subsidy because I have chosen to take on addition debt?

 

A large part of the cost of motor fuel is taxation. By reducing this tax we must either cuts services or raise taxes, either now or in the future. Country dwellers and motorists, which services are you proposing to cut? Which taxes are you proposing to increase? Not mine I hope. When I paid additional stamp duty on my urban flat did you offer to sack one of your children’s teachers so I could avoid the tax? No? Hands of my kid’s school then.

 

A large part of the difficulty we find ourselves in is caused by our collective and individual failure to understand the risks we were signing up to. We should all do better next time round. This does not start by taking a risk you created for yourself and trying to export it politcally to other people. That sounds like a banker’s strategy.

Comments

[gonzo21.livejournal.com]

Yes, it's a problematic issue, created by the boom in people investing in property, creating what I imagined was an unsustainable bubble in property prices. Yet even with this massive crash, I notice property prices continue to edge upwards, just at 1-3% a year, instead of the 10%+ PA return that people were getting.

I think there needs to be a massive adjustment in property values, which will probably only be driven by interest rates going up, and people suddenly realising they can no longer afford their huge mortages on their property portfolios.

(And I think interest rates have to go up, otherwise with all the quantitative easing that's been going on, we're going to wind up with the threat of runaway inflation.)

[andrewducker]

Not this week:
http://www.bbc.co.uk/news/business-12700649

But I'm sure they will at some point in the near future.

[gonzo21.livejournal.com]

I think there may be an argument that despite the financial crash, many people in the UK are better off than they have ever been before, purely thanks to the low interest rates.

I mean. I can remember when interest rates were what, 10-15%? And peoples homes were at risk of being repossessed left right and center. But... it kept house prices from being affected by runaway inflation.

Who would be an economist.

[danieldwilliam.livejournal.com]

Who would be an economist.

Me. Sort of.

Low interest rates have certainly helped compensate for the general trend upwards in prices driven by energy, commodity and food prices.

I think there is a fundamental supply side problem with housing. We just don't have quite enough of it in quite the right places and we seem unable to build more.

[gonzo21.livejournal.com]

Economics always seems like an area to me where if you make one change for the better here, then it causes a dozen bad things to happen over there that you never saw coming.

And yes. I think there may be a fundemental supply problem with lots of things, not just housing. Food and energy.

Plus as the developing world starts to act as markets for medium skilled jobs, as well as basic jobs, it's hard to see how the western countries are going to hold on to anything in the way of wealth.

I mean, like, the way that computer games developers are starting to get rid of expensive programmers in the UK, and hire cheaper programmers in Eastern Europe. Or the Japanese games industry shifting work to China.

It's hard to see what we might be left with at the end of the day.

[andrewducker]

Well, what I suspect we'll see is a drop in quality of life over here (or, hopefully, a stasis in it), as the rest of the planet catches up with us.

If technology keeps moving the way it has been, of course, it'll just mean us increasing our quality of life more slowly, as the rest of the planet accelerates madly in our direction.

But in any case I expect that we'll be getting ever more equal over the coming thirty years, and that this will infuriate those people who think that westerners have an inalienable right to a better lifestyle than the rest of the world.

[gonzo21.livejournal.com]

I think a drop is inevitable. Wages in the UK will have to drop fo rhte UK to remain competitive with emerging middle-classes in the developing world.

Which probably means the annihilation of the middle-class in the UK.

Which in turn, tends to result in fascist governments.

[andrewducker]

I don't think it means the annihilation of the middle class. It may well mean that their quality of life remains stagnant for some time, but I'm not forseeing a collapse any time soon.

[danieldwilliam.livejournal.com]

Like Andrew I’m not too concerned about the middle-classes over the next ten years.

For starters, Western workers are still more productive than non-Western workers and as non-Western workers see their wages go up it narrows the gap between their cheapness and out goodness

Whilst it’s true that there is increasing competition from abroad for higher skilled jobs and this is placing a cost pressure on our wages it does have two advantages that don’t get mentioned as often as they should be.

Firstly, if they are cheaper it means access to cheaper stuff for us. This was true of simple manufactured goods and will be true of more complex manufactured goods and services.

Secondly, as they become wealthier they will buy more of our stuff and it will be the really valuable and hard to reproduce stuff.

This second point helps us in a number of ways.

Firstly, they will just buy more stuff from us. So industries like whisky, oil and gas services in Aberdeen, life science, financial services will all do well.

Secondly, with more wealthy people in the world the fixed costs of things are spread over a wider base. This affects a huge number of things like dealing with Somali pirates (come on Indian Navy), R&D costs (add 100m Indians and 100m Chinese to the 400m Westerners who might buy the next smartphone and you can spread R&D much more widely, cost of internation institutions (I look forward to Eastern European countries contributing more to the cost of the EU or NATO so that I don’t have to).

Thirdly, with more wealthy people in the work doing more thinking technology should move on an increasing pace steadily improving the quality of goods and services and reducing their cost.

This effects will affect different industries differently. There will be winners and losers. Good times for anyone who adds a lot of value to their output in a way that is hard to copy or who sells premium goods or services. Bad times for anyone operating on narrow margins.

So for the next few years things will rough for us, and for the next ten living standards might stagnate on average but there will big variations.

I think the people who will really suffer are the unskilled workers of the West. Unable to compete on price with the Chinese or on wage-adjusted productivity with Eastern Europeans they will struggle for jobs and a middle class that is squeezed, or at least telling itself that it is squeezed, will be increasingly reluctant to provide transfer payments.

Kids, stay in school.

[andrewducker]

Yeah, I agree with all of that.

We're more efficient, and locality is still useful (even in these days of hyper-communication). This will presumably change with time (at least the former will), but for the moment I'm not too worried.