Loud

Probably my last comment on this matter, it hasn’t appeared in the freakonomics comments thread as of this writing but here it is:

I’d like to take the time here to point out some of the points of agreement between myself and Bjarki.

Namely, that Iceland’s current situation where our economy is markedly worse off than the European average (dramatically higher interest rates and price inflation, amongst other things) is something that our ruling parties could have avoided and in many ways is due to their folly.

Also the point that we need to work on industries that produce things of value instead of just shuffling paper around is something I heartily agree with, especially in light of the ongoing disaster that is our financial sector.

We disagree on heavy industry, not as zealots or idealists, but because we simply assess the gains versus losses the industry offers Iceland as a nation and as an economy in different ways. I think other export industries such as software, media and design could offer the economy much more for much less investment and much less environmental damage.

I’d guess that Bjarki would say that it isn’t an either/or situation, we could do both, and the truth probably lies somewhere in the middle.

My feeling hinges on a simple fact. Heavy industry isn’t aspirational. If we are to have any sort of ambition as a nation we need to aim much higher than just becoming a cheap place to process energy intensive basic commodities.

Addendum: I feel like I’ve had this debate a thousand times with almost every single Icelander I’ve met who isn’t in the media or software industry.

I think I’ll just have to accept that most of the rest of Iceland disagrees with me and the surge of heavy industry in Iceland will continue unabated and unopposed.

More of me arguing on the freakonomics weblog:

Bjarki, cheaper financing (“cheaper” here being one of those unfortunate, non-distinct kind of words that understates the deal they are getting) is “a dollop of money” that’s the whole lesson behind the current worldwide economic malaise, money has been borrowed and lent into existence.

I don’t know if you remember the economists debating the Kárahnjúka plant when it was about to go into production but the gist of their message was that the production, loans, added credit—-the entire enterprise—-would create massive inflationary pressure on the Icelandic economy. That the government added to that by loosening banking regulation and driving up the housing sector just meant that they were compounding the initial inflationary mistake. And the amounts involved in the entire enterprise combined are anything but miniscule. In my haste earlier I did make it sound like the government-backed loans were the primary inflationary force (for that I apologise) but they were key in getting the project approved and going and warrant in my view being highlighted as such.

There is a reason why the heavy industry debate is sparking up again here in Iceland, they plan to reinflate the economy the same way they inflated it last time.

Aluminium smelting does not create “things of value”, it creates commodities only differentiated by price. Creating things of value would be if we didn’t export pure aluminium but built an industry on designing aluminium products and exported that. Value creation is in the design and manufacture of end products, not in non-distinct commodities.

Yes. I don’t want to work in a smelter. They may offer paid jobs but that doesn’t take away the fact that if jobs were the only criterion we could have created 800 jobs with a fraction of the investment and none of the environmental and political damage that the Kárahnjúka plant caused.

I continue my comment spree on the freakonomics weblog:

No 19, the government subsidises the electricity prices to big industry. They get their volume discount, a fixed price for decades and on top of that a huge dollop of government money.

The Kárahnjúka plant was made despite the warnings of geologists (it’s on a fracture in a geologically active area), biologists (the dust clouds from the periodical drainings of the lake were considered likely to cause desertification of the surrounding wilderness) and economists.

The economists objections are worth noting. The Kárahnjúka plant in itself once it’s fully operational could cover the entire country’s domestic needs. It required massive foreign loans on the part of Icelandic companies which became a big driving force in the inflation that’s crippling us now. It’s owned by a foreign company so all of the profits go abroad. The power company doesn’t expect to profit from the arrangement for 40 years.

The benefit, supposedly, is going to be jobs and more jobs (via a magnification effect through the local communities). The problem is, even in these dark days, we only have about 1-1.5% unemployment and most of us in the country work in finance, education, health service, software, tourism, fishing or the service industries around those. The aluminium smelter will offer only about 800 jobs. Most of them done by imported labour because Icelanders don’t want to work in heavy industry.

Icelanders don’t need more jobs, we need more interesting jobs. That has been sabotaged by the government’s policies of emphasising heavy industry and economic and immigration policies (it seems it’s only easy to get unskilled labour from abroad, not skilled, they might stay) that make it very difficult to run something like a software export company in Iceland. Most resort to moving a large part of their operations abroad and keep their headquarters in Iceland for tax purposes.

Iceland’s economy is a mess and it is largely the fault of heavy industry, hydroelectric plants and a complete disregard of the voters wishes (one of the ruling parties was elected in the last election mainly on a platform of no more heavy industry, the other ruling party claimed that the emphasis on heavy industry wasn’t their policy at all but that of those they formed the previous government with).

I just made a terse, possibly too annoyed, comment on the Freakonomics weblog. To doubly make a fool of myself I’m going repeat it here:

A few notes here. I’m an Icelander and it so happens that I’ve studied some of that whys and wherefores of Iceland’s rise.

The first thing you need to do is to learn to spot the mythology. These are the “facts” that most Icelanders believe in but are mostly PR and nationalistic hype.

Aluminium smelting contributes less than 3% to our GDP and most of that even goes out of the country as profits to their overseas owners. Most of the staff are foreigners and the power prices are subsidised and fixed for an extended period of time (varies from smelter to smelter but on the order of 40 years in each case).

The power plants on the other hand are a large cause of our current crisis as the government owned agency took out a 1.5 billion dollar loan (government guaranteed) to finance just one of its plants. That in addition to the newly privatised banks taking on similar loans to “fund growth” lead to a massive bubble in the financial sector and the housing sector. The central bank tried to stave off consumer price inflation by ratcheting up the interest rates and strengthening the kroner, which has completely sunk most export companies that haven’t moved most of their operations abroad.

When the bubble collapse (triggered by the collapse of the separate bubbles abroad) the kroner went with it.

The sad fact is that cheap energy has little to do with our current financial “success”. Now that the kroner has adjusted, energy prices to the consumer are fast approaching those elsewhere in the world (ours isn’t subsidised like that to the smelters).

Geothermal energy isn’t renewable or clean. Hydrogen-sulphide levels in Reykjavik spike way over the European health limits on a regular basis with just a fraction of the planned geothermal plants in operation. The lifetime of a geothermal well like we’re planning is 40 years, after that it will stop working. This is according to the people who are building the plants.

All of our hydroelectricity comes from glacial rivers or mixed water rivers. These carry mud. Tonnes and tonnes of mud. Most of our large hydroelectricity plants will become inoperative within my lifetime for that reason. Again, this is according to the people who are building the plants.

This is not to say that you can’t argue that these plants are sound investments, but renewable they ain’t and neither are they environmentally friendly (unless hydrogen-sulphide and sulphur-dioxide suddenly turned into “nice gasses” when I wasn’t looking).

People need to be much more critical when they listen to the hype from my countrymen.