Nationalising the trains won’t solve this problem

It’s something of a puzzle why the idea of nationalising the train system again is so popular. The complaint seems to be that ticket pries are high, if we nationalise then ticket prices won’t be so high. Apologies for referring to Richard Murphy again but he has laid out that fallacious argument for us:

The Tories want to regulate rail fares.

Almost all rail companies are already state subsidised.

Rail rolling stock leasing is a tax arrangement for the finance industry.

The farce of rail privatisation continues when the state run East Coast route proved that state ownership works best.

And yet only the Greens are stating the obvious, which is that the answer to these state interventions in an industry that should never be in private hands is nationalisation.

I really think the time for rail nationalisation has come.

It is true that ticket prices are high as compared with other European countries. It is also true that there are subsidies. But this does not then go on to mean that nationalisation will reduce train fares. Because the reason that train fares are high is the result of a deliberate and specific political decision. That British train travellers should pay more of the cost of their journeys than do travellers in other European countries.

This is not a function of who owns or who operates those railways. It is, as we say, a function of a deliberate political decision. That there’s going to be some mixture of general tax subsidy to railways, plus some measure of income from travellers, is an accepted fact by all. At some point we need to decide what the split between those two is. Should that retired accountant in Norfolk have to pay the full cost of his travels around the country to campaign, should the general taxpayer be subsidising him to do so and if so, to what extent?

The general outcome of this decision is that, here in the UK, we expect those doing the travelling to pay more of the cost of their travelling than other European countries conclude. This is not, as above, an outcome of how the industry is structured, owned nor run. It’s simply that we have decided that non-train travellers should be subsidising train travellers less than others conclude.

You can, of course, make other arguments for nationalisation. But this specific one doesn’t work. Because train tickets are not priced as they are because there are private operators. But priced as they are because we’ve decided on less subsidy. And that subsidy could be increased (not that we would argue that it should be) without nationalisation, just as that subsidy could remain the same with nationalisation (not that we would recommend that either).

This is an argument about the correct level of subsidy, not one about who owns or operates. Thus changing who owns or operates changes nothing about the subsidy nor ticket prices.

Why don’t we just be sensible about housing?

A fine piece in the Telegraph about British housing. The major point being that we have so many layers upon layers of housing policies, each trying to undo the inefficiencies created by the previous layer, that we might as well scrap the lot and actually have a free market again:

Each and every proposal wheeled out in the course of the election campaign involves yet more complexity. Hidden subsidies are added to distortions, and rules and regulations are piled on top of each other until their purpose gets lost. If a therapist was analysing British housing policy, they’d quickly conclude the patient was suffering from obsessive-compulsive disorder. The Government comes up with one kind of subsidy, doesn’t like the side-effects, then comes up with another to try to correct it.

In fact, the simplest thing would be to strip away all the distortions, and try creating a free market in housing.

Quite so, we have been saying this for some time ourselves. Just as an example, the last time the British housing market managed to produce the level of new build that all say is necessary today was in hte 1930s. That is, before the Town and Country Planning Act and back when we did in fact have a free market in who may build what and where. If we want to get back to that level of building then why on Earth don’t we go back to those policies? We do, after all, have actual evidence that it works.

Worse, and this is less widely discussed, our homes are getting smaller. A survey by LV Financial Services last year found that the average size of the British home had shrunk by two square metres, from 98 to 96 square metres, in the decade from 2003 to 2013. The average new home built in the last five years measured only 76 square metres, so that average is only going to come down. According to research by the think tank Policy Exchange, we now have the smallest homes in Europe. Even the Greeks have more space to live in than we do.

The average Irish home is 15pc bigger, a Dutch one 53pc, and a Danish one 80pc more spacious. Those are huge differences, given that many of those countries are poorer than we are, and just as densely populated.

Why are we doing this to ourselves? Insisting that people live in rabbit hutches that cost 5 and 7 times annual incomes? And, as we all know, the major cost of a house in the SE of England (where the problem actually exists) is that scarcity value of the chitty to build a house on a particular piece of ground. Simply issue more chitties and the problem is solved. Better yet, abolish the system of chitties altogether.

You know, the way to solve problems caused by government is to get government to stop doing the things that cause the problems. Housing is expensive in England because of government, let’s have less government and make housing cheap again.

A most interesting argument about the housing market

We might also term this an interesting installment in our “How to lie with statistics” course. From the Green MEP for the South East:

Perhaps as a result, the south-east has seen the biggest rise in rough sleeping levels with a shocking 96% overall rise since 2010. And in 2013/14, no new social housing was built at all by the region’s local authorities.

This represents a massive political failure to serve the interests of our communities.

Well, no, not really. Here are the numbers for housing completions in Britain. What you will note is that council building of houses is, as is stated, pretty much non-existent. That’s because we changed the way we did this, moving over to social housing being constructed by social housing associations, rather than councils directly. We can still argue, of course, that more of these should be built. But the way that number has been quoted leaves the impression that no social housing is being built: when some 25,000 units were last year, at least some of which will be in the South East.

Then there’s this which is a most ugly idea:

This should be implemented alongside a “right to rent” policy. Homeowners who are unable to meet their mortgage payments and are under threat of repossession would have a right to transfer ownership to the council, at less than market value, in exchange for the right to remain in the home and pay rent as council tenants. This would stop people living under threat of eviction and in fear of not being able to make next months rent.

This is equivalent to compulsory purchase of the property by the council. And given that it’s at less than market value it is a confiscation from the holders of the mortgage. It’s flat out theft in fact.

That then has an interesting knock on effect: if the security of a mortgage is to be called into question in this manner then all mortgages will cost everyone more. Further, quite apart from this, negative equity is not eradicated upon the sale of a property. The total amount is still owed to the mortgage holder. so this solution doesn’t even solve that problem of people being in negative equity.

Yes, this is election season and all sorts of barkingly mad things are proposed at such times. But really, this could do with a bit more thought.

Electric cars won’t save drivers anything, not one single red penny

We have the glorious news today that if only everyone drove electric cars then everyone driving an electric car would save loadsamoney. It isn’t actually true though, electric cars won’t save drivers anything at all, not one single red penny:

Electric cars could cut the UK’s oil imports by 40% and reduce drivers’ fuel bills by £13bn if deployed on a large scale, according to a new study.

An electric vehicle surge would deliver an average £1,000 of fuel savings a year per driver, and spark a 47% drop in carbon emissions by 2030, said the Cambridge Econometrics study.

The paper, commissioned by the European Climate Foundation, said that air pollutants such as nitrogen oxide and particulates would be all but eliminated by mid-century, with knock-on health benefits from reduced respiratory diseases valued at over £1bn.

But enjoying the fruits of a clean vehicle boom will require an infrastructure roll-out soon, as the analysis assumes a deployment of over 6m electric vehicles by 2030 – growing to 23m by 2050 – powered by ambitious amounts of renewable energy.

And who, might we ask, has to pay for that infrastructure? Ah, yes, of course, that’s us, the general taxpayer, isn’t it? So, we’re asked to dig into our pockets to make driving cheaper for other people. And given that it’s not the poor who are going to be buying expensive electric vehicles that’s us, the general taxpayer, subsidising the better off, isn’t it? Not quite the way this is meant to work.

However, there’s another problem with this. Which is that electric cars aren’t going to save drivers any money at all, not in the long term. For petrol driven cars, if petrol were untaxed, are still very much cheaper than electric cars. Sure, for environmental reasons that might mean that a bit of subsidy to get the new technology rolling might be worth it (not that we agree but we’re willing to accept the possibility at least). And that tax on petrol does raise some £27 billion for the Treasury, at least it did last time we looked.

Politicians are not simply going to acquiesce at having £27 billion less of our money a year to play with and dispose of as they wish. Thus, as electric cars become a larger portion of the fleet so taxation of electic cars will rise in order to replace that revenue lost from taxing petrol. That £27 billion is still going to be extracted from drivers whatever else happens.

So given that the savings from electric vehicles are entirely tax driven, and the tax system will not, as soon as the revenue loss becomes noticeable, stay static then we cannot say that the widespread adoption of electic cars will save drivers money.

In fact, given that the electric car untaxed is still more expensive than the petrol car untaxed, yet the political imperative will be to make sure that tax revenues do not fall, we will find out that electric cars cost drivers more than petrol driven. Because, once electric cars become popular, they will have to carry the costs of their inefficiency and also that same tax burden.

This idea that drivers will, in the long term, save money by having electric cars is thus a con. It simply won’t happen: not when politicians so enjoy spending the money they raise through the taxation of driving.

How we wish for financial literacy amongst the commentariat

From a certain Ms. Orr:

The government is thrilled that it has found a buyer for the Treasury’s 40% stake in Eurostar. And no wonder. An Anglo-Canadian consortium has offered to pay £757m. In the autumn of 2013, when the coalition first announced its plan to sell, it expected to raise £300m. Which looks like prima facie evidence that the government doesn’t have much idea about how valuable national assets are. It’s all, says the chancellor, George Osborne, “part of our long-term plan to secure Britain’s future.” To an idiot such as myself, it looks like part of a long-term plan to secure the future of Patina Rail LLP.

But in the long term, selling off state-owned, profit-making assets can only ever make the government all the more dependent on tax revenues. As ever, profit gets privatised and risk or liability remains the business of the state…..Osborne has said that this money will in part be invested in infrastructure. Great. When that money has been spent on some infrastructure, when the risk is over and the profits are starting to flow, that in turn can be sold to the private sector,….

Well, yes.

What seems to be missing from Ms. Orr’s understanding is that the £750 million the government will receive is the net present value of all future profits that are expected to be made by the line. In fact, looking at 2014 profits, it looks like some 35 times annual profits or so on that 40% stake. Which is a very fine price indeed to achieve.

Now, we’re not really fans of the government building or running railway lines but let us suppose that you are. You also note that government can borrow cheaply, has the ability to pass laws over rights of way and so on. It is thus cheaper for government to take that early risk in the planning and set up of a new line. Once the line is up and running then the multiple of future profits which it is worth is very much higher than it was at the beginning, when there were still risks as to whether it would be finished, find a customer base and so on.

So, government invests at, say, a multiple of 10x future profits, brings the project to fruition and then sells it at 35x future profits. This looks like a very profitable indeed deployment of the government’s special privileges over financing and the law.

That is, the sale of such a project once completed is an excellent idea.

Now, we all know why this doesn’t happen in general. Government ends up investing in projects for political, not economic reasons. Cost management on public contracts is ghastly and they are therefore always over budget (I am told that the last one to come in under time and under budget was Polaris, which we bought lock, stock and barrel from the Americans).

However, this doesn’t change the fact that if as and when government actually does manage to produce a profit making enterprise then it really should sell it. For that’s the best way to capitalise upon those special attributes that government has.

By the way, it’s worth noting that this stake was sold at something like 35 times last year’s attributable profit. Not 35 times the income, whatever that lower number will be, from holding the stake. It’s thus a very good deal indeed.

But our wish here is that the commentariat would actually understand the financial basics here. The capital sum you sell for is the net present value of all future profits. We’re simply swapping money today for money in the future, that’s all.