The Pin Factory Blog

This week Royal Mail, the UK's state-owned letters and parcels delivery business, is expected to announce profits of £300m-£400m. A few years back, the Royal Mail looked like a loss-making sunset business. Emails were replacing letters, and delivering bits of paper to 28m homes in every corner of the UK seemed like a good way to go broke.

Now we are sending even more emails – the Royal Mail's staples of greetings cards are being replaced by e-cards too. Bills and statements are going increasingly online, and more of us pay them online rather than putting a cheque in the mail.

But what is saving the Royal Mail is its parcels business. With email we are sending fewer letters, but with the web we are shopping more online. Losses in the letters business are being overtaken by profits in parcels. The UK online retail market was £78bn, up 12.8% on the year before. Department stores' online sales grew by an astonishing 37%. Around one-fifth of our retail purchases are now made online. A business that can deliver to 28m homes now suddenly has a value again.

What Royal Mail needs, though, is new capital to invest in this parcel delivery business. They know they won't get it from the government, which is deep in debt. They need new capital from the market and new strategic partners from business to help them invest it wisely and develop the parcels business. That means privatisation. On this weeks figure, it could be a £3bn business, which means a share offering to the public. On past form, the government will sell 51% and pocket a useful sum. But once the new capital is invested and is making the parcels business even more profitable, it could pick up even more when it sells the other 49%.

Stephen Littlechild, Professor emeritus at the University of Birmingham, fellow of Judge Business School at the University of Cambridge and a top regulator from 1983 to 1998, explains how politicians and regulators have, by misunderstanding how markets work, regulated to boost energy firms' profits at the expense of higher bills for consumers.

Britain’s competitive retail energy market was the first in the world, and for many years the most competitive. It had the most active suppliers, and the most active customer switching. This competition and choice brought better offers for customers. It may not seem like it because of recent energy price increases. But these reflect increases in fuel costs like gas, higher costs of renewable energy and other obligations on suppliers, not a lack of retail competition.

In fact, retail competition was sometimes too fierce, witness the problem with doorstep mis-selling. But Ofgem took action to fix that problem.
Retail profits in the domestic sector used to be minimal; Ofgem calculated that many were negative. New entrants came into the market, but until recently most found it tough to survive.

Retail competition has been enhanced by a dozen switching sites. Each seeks the best way to attract users, to offer the simplest calculations, to include the most relevant information and the clearest comparisons, to facilitate subsequent switching. No other country can boast as lively, innovative and effective market for information and assistance to energy customers as Britain.

Continue reading.

The European Commission has launched an investigation into oil prices. They suspect that prices may have been artificially inflated in order to swindle motorists out of their cash.

They are right. And they should start their investigation at the grand offices located at 1 Horse Guards Road, London SW1A 2HQ. That's not the headquarters of Shell or BP, but the home of the UK government's Treasury. After all, more than half the price that motorists pay at the pump is in fact tax. The product itself costs about 48p a litre to produce and get to the pump. The retailer gets about 5p. But on top of that, there is fuel duty of 58p for a litre. And 20% VAT on top of all that. Indeed, because VAT is added to the whole price, including the fuel duty, motorists are actually paying a tax on a tax!

VAT, of course, was raised recently in order to help balance the government's books in the wake of its bail-out of the banks. So that explains part of the increase in prices. More comes from the 'fuel escalator' – the principle that fuel duty should rise by more than inflation, in an attempt to induce us to leave the car at home and save the planet. (Politicians are remarkably adept at picking our pockets while telling us it's for our own good.) The escalator forced up UK fuel prices from below the EU average, to make them now among the very highest in Europe. And the tax on fuel is now several times what any economist can justify as a fair charge for the carbon that vehicles emit.

The bottom line is that more than tax on motor fuel is more than 80p a litre. Which makes George Osborne's offer to 'stabilise' petrol prices by shaving 1p off the tax look rather feeble. If the European Commission wants to get to the heart of the great petrol price rip-off, they should immediately call the Chancellor in for questioning.

Recently, Kier Martland produced an article in The Libertarian attacking Sam Bowman's take on immigration, suggesting an alternative libertarian view on the issue – using Hoppe to back up the position. I think this view is entirely mistaken. Indeed, Anthony Gregory and Walter Block take apart Hoppe's position here and Block again here.

The position taken by Hoppe is that nobody should be able to make a claim on the state without 100% consent from those paying for it, including for goods such as roads. The issue is that the state does exist, so long as there is government we should seek to ensure a policy of least damage done. By having high costs or even bans to hire migrants, the state would be taking away people's right to freely associate and make contracts. Further, by increasing the cost of labour, and doing other such damage to the economy as described in Bowman's article, restrictions on immigration do damage to the taxpayer. Hoppe's “second best” position simply doesn't hold true.

If one group in society objects to immigration, that does not mean migration is wrong because they pay a small percentage of the cost (even though, again, immigrants are a net positive for the tax collector). Indeed, the same argument would hold true for economic nationalists or greens who wished for only local goods to be sold in the economy. By importing foreign products, one would be initiating trespass on the roads by transporting goods unwanted by third parties. The same could be said of any good transported that an individual disapproved of, whether alcohol, meat products or any other “vice”. Similarly, Christian Scientists or others who disapprove of modern medicine might insist that taxpayer roads not be used for transporting any related materials. The position is ridiculous, you cannot support absolute rights to reject immigration whilst not supporting the same absolute right to reject other goods and services people might disapprove of.

By suggesting an increase in government control of migration, both Martland and Hoppe are going the wrong way on this issue – it is not about defending the taxpayer. Increasing the scope of the state, and the cost to taxation in policing it, as the Hoppeans propose, is damaging. What about those who pay taxes that DO want immigrants to use government services such as roads? Are their rights lesser than those who are for government restriction? Even if the costs and size of government are larger to be more restrictive? Should they be forced to fund border forces in this way? The Hoppean position on immigration is illogical; you do not reduce the scope of the state by increasing it and the number of tasks it undertakes. We should be looking at ways to limit the damage and cost of government now, and not sit in ivory towers trying to fudge a philosophical position that takes away the right of free association.

Easter in Britain is one of the busiest shopping days of the year, with garden centres and DIY stores in particular full of people stimulated by the spring weather – well, when we are not having an Arctic spell – to bring a bit of a new look into their homes and gardens.

But larger stores, like those same garden centres and DIY stores, will be able to open only six hours on Easter Sunday – like every Sunday. Convenience stores can stay open longer, but retail premises larger than 280 square metres are allowed only six hours.

That alone should make us question the Sunday trading hours. It is a completely arbitrary number: why not 250 or 300 or 350 square metres? Laws should apply to everyone, or to nobody.

Since limited Sunday trading was introduced, Sunday has become an important shopping day. It gives families in particular a little more time at the weekend for those large purchases that they want to make together. It used to be hard to do that and get in the weekend food shopping at the same time. It has actually made things more relaxed.

Remember too that other important shopping days often fall on a Sunday – Christmas Eve and Boxing Day, for example. Retailers right now could really use the boost of a proper day's trading at these times, especially those who are  losing trade to online alternatives.

The Sunday trading laws were relaxed for the Olympics and the world did not come to an end. Subject to reasonable planning restrictions to prevent local nuisance, we should relax them entirely. Why should the government decide whether people can and cannot shop, or can and cannot open for business?

The law states that employees can refuse to work on a Sunday without fear of retribution. That should really apply to other days too – not everyone has Sunday as their religious day of rest. And of course, nobody has to shop, or open their shop, on Sunday if they do not want to. Why should those who do not want to be able to force the rest of us to comply with their choices?

What do you think of when picturing an ‘innovator’? I would hazard a guess that the skinny, t-shirted frame of a computer developer forces his way into mind. He is likely in the middle of developing a new app or website, and is keen to end his summons before your mind’s eye to get on with typing inscrutable code and eating pop tarts.

This is a shame. Not the interruption of our computer nerd - who we’ll leave alone now - but the fact that innovation has become such an internet and computer centred phenomenon. It is also, however, no coincidence. The ‘techy’ sectors have enjoyed huge advances in recent years in no small part because of the relative lack of regulation and red tape they’ve faced.

This has kept start-up costs low, compliance with legislation cheap, and product development swift. The economic benefits of this business freedom have been extraordinary. In 2010 the UK internet economy contributed £121bn to GDP, in 2016 this is set to be £225bn. This is a remarkable 86% growth in 6 years. According to McKinsey in 2011 2.6 jobs were created for every (mainly high-street) job lost. It is no surprise that London’s ‘Silicon Roundabout’ has grown in notoriety in recent years. We would do well to follow the advice of Dominique Lazanski’s recent ASI paper to keep the stellar growth going.

Other sectors have not been so lucky – over the decades industries like pharmaceuticals and food production, which once saw equally impressive innovation, have been overwhelmed by creeping legislative burdens. The rise of the grisly ‘ealf and safety brigade, backed by big business eager to block new entrants, has gradually put a stop to the leaping advances. The regulatory obstacles are so great now that aspirin would not be passed by the FDA (it would be red flagged because it risks causing gastrointenstinal bleeding). Similarly, rising levels of regulation contributed to the end of so-called ‘green revolution’ in food production between the 1940s and 70s, which hugely increased yields and lowered prices.

The risk of failing to comply with standards discourages businesses from engaging in the kind of innovation that can lead to radical break-throughs. It is safer to opt for more mundane improvements safe in the knowledge that they will be allowed to make it to the market-place.

I can hear the hard-hatted inspectors and boardrooms bursting to object. ‘This regulation is designed specifically for the benefit of consumers, they clamour; in its absence people would be exposed to improperly tested, and therefore potentially lethal medicines and foods. ‘Are you in favour of sacrificing human lives at the altar of innovation?’ they ask.

I can think of two replies to this. First, in the developing world millions die of starvation and disease; if more rapid advances were allowed many more lives would be saved than lost. Second, as our President Dr. Madsen Pirie argued so persuasively on the Daily Politics, the expectation of progress and improvement is an important component of a society’s well-being. Increased optimism about the development of new life-saving medicines and lower food prices would be a welcome addition to looking forward to the new iPad.

A bonfire of regulation would attract the best innovative minds from around the world and reignite economic growth and job creation in Britain. Exit double dip recession, enter double digit levels of growth. Who knows, we might even discover another drug as effective as aspirin. 

Is there anything more terrifying and dangerous to liberty than a 'moral panic'? I use the term in its sociological sense as the horsemeat saga fairly seems to fit the bill. One can almost write the script: a small finding, further investigations hit the front pages, the press become fixated and call for the heads of those responsible, government steps in, calls go out for a public enquiry and regulation or a toughening up of the rules and more spending on enforcement... In a few weeks the issue itself is largely forgotten except that the resultant regulations last forever. Worryingly, the scandal has also prompted attacks on international trade in food products and displayed the economic nationalism we see in this country with calls to eat only British meat.

The most puzzling feature of this particular saga and many others is the belief that additional regulation can solve the problem. In many ways, food was one of the first areas of the economy to be regulated under the Food Adulteration Protection Act of 1860, prompted by noticeably similar Victorian fears. In a curious and amusing echo of the banking crisis, we already have a regulator called the FSA, the Food Standards Agency (is the repetition of acronyms just coincidence, or a sign that we have so many quangos there aren't enough names?), which runs a Food Authenticity Programme. Although the FSA has been at the centre of the scandal, DEFRA also has powers in this area.

It is clear that there has been widespread adulteration of food products despite the presence of these institutions. Indeed, as with the banking crisis, it may be that regulation has encouraged it in various ways. Interestingly, a former bureaucrat at the FSA has suggested that the EU may be partially responsible owing to its ban on 'de-sinewed meat'. What is evident is that regulators will not prevent such events happening. Instead, as the ban on de-sinewed meat suggests, regulation will cause unintended consequences. Additional requirements for 'traceability' and more enforcement will increase costs for supplier which will be passed on and further drive up food prices for already hard-pressed low-income consumers, or it will promote cost-cutting and thus adulteration. Regulation will tend to drive smaller firms out of the marketplace, allowing room for monopolists to dominate the market. One should note that food industry lobby groups are usually happy to call for more regulation as well.

Surely, it would be better to allow a more competitive and de-regulated marketplace, where consumers could choose whether they paid additional costs to guarantee the quality of their products and where market innovations could find more effective ways of policing?  Why is it that, whenever a crisis such as this occurs, calls for more regulation emerge despite (i) the failure of existing regulation (ii) the evidence that regulation may actually have contributed to the crisis and (iii) the effect of regulation will allow monopolistic behaviours and ultimately harm the consumer?

We around here are pretty much in with the idea of free immigration. Even the scary statistics coming out of places like MigrationWatch show that there's a very small (about £4 a year I recall) benefit to the indigenous population. And of course the value to the immigrant is vast making it a definite pareto improvement. And as Bryan Caplan likes to point out, the immigration of low skilled immigrants still enables a more fine grained division of labour within the country to everyone's benefit.

But OK, let's be a tad political and realise that not everyone agrees with these obvious truths. That immigration must be limited in some manner. So, err, how have we ended up with a set of immigration restrictions that are so stupid?

The Royal Society says a separate government scheme introduced in 2011 to attract 1,000 top academics and artists had allowed only 50 people in.

That a government policy fails is hardly a surprise. But OK, they're trying to get top academics in. So why would the new rules have meant that one of our recent Nobel Laureates couldn't have got in?

Russian-born physicist Professor Sir Andre Geim said new restrictions on non-European Union immigrants, including minimum salary requirements of at least £31,000 and tighter student visa rules, are blocking the brightest academics from working at British institutions.

Well, you see, the thing is that British academics aren't all that well paid:

Sir Andre, 54, first arrived in the UK in the early 1990s as a Russian citizen with a permit to work as a post-doctoral fellow at Nottingham University. His salary would have been around £27,000 in today's money, meaning that he would have been barred from entry under the minimum salary requirement.

So the government wants to get all these top academics coming in, to the point where they've got a scheme to aid them in coming in. At the same time its own salaries that it pays to top academics (and yes, post-doctoral students are indeed that, they're all the people having the bright ideas. Professors are those who are old enough to have stopped having new ideas) mean that they cannot immigrate into this country under the requirements for immigrants to have a high salary.

Something of a facepalm moment that.

Which brings us to an important point. Government just isn't capable of doing these complicated things. Is incapable of the finesse necessary to achieve solutions to tricky problems. So we might well be better off if they didn't even try. You know, cut government back to the basics of defending the country and maintaining at least a semblance of law and order. Once they've shown they can manage that we might allow them to at least trying more difficult things. But not until they've shown they can master the basics.

During a downturn, calls for regulation to protect the most vulnerable grow more common — and more worrying. The costs of regulation are costs on goods and on jobs, and likely to reduce the availability of both. When the economy is floundering, further regulation will serve to put the brakes on growth. Here are three reasons to oppose more regulation.

Regime uncertainty

If businesses can’t be certain of future regulation, this disrupts their future planning. Even in the absence of the state it is difficult for entrepreneurs to anticipate future patterns. Often heavy handed and clunky regulation is thought out by those with little knowledge of the businesses they attempt to control.

Regulators can also be captured by large businesses who find it easy to be compliant with more regulation. It is small businesses who can not cope with this complexity who suffer most. Rather than protecting the public, a climate of meddling regulation can scare off new businesses, and in turn new activity and jobs.

Old regulations become obsolete

You have probably seen a compilation of ancient and bizarre laws still on the statute books. Rules on how horses and carriages may be used are still around. While no government has deregulated in such areas, innovation has made the rules all but redundant. As the electric telegraph replaced the letter, the phone replaced the telegraph, and so now do voice over IP and other forms of electronic communication replace it.

We can rely on human progress to invent new things that politicians have not yet found ways to restrict. It is interesting to note that since the financial crisis it is technology, the least regulated sector, that has performed best. If government does not introduce new regulation, then politicians need not pay so much lip-service to deregulation. Human creativity will do the job for us.

Markets do it better

The good news is that government is not the only regulator. Voluntary exchange leads to market-based regulation. It is in the interest of firms to not sell a product that poses a risk to the consumer. Companies do not tend to sell dangerous furniture. If a product is poorly constructed, such that it may cause injury, the producer could face reputational damage. It is this direct feedback mechanism of profits that makes the businessman accountable to consumers. To truly empower the 99%, the regulation of the market over firms is direct, as opposed to sluggish democratic processes.

We all know that militant trade unionists went over the top in the Sixties and Seventies. But the rot set in a lot earlier. During the First World War, the American government nationalized the country's railways. They were returned to the private sector in 1920, in a dilapidated state.

The Pennsylvania Railroad was desperate to repair the damage to its infrastructure and the staff's morale. It realized that its staff were an important asset and that they needed to be motivated to prevent technical faults and ensure the network worked smoothly. So Ivy Lee, the company's PR advisor, argued that "The employee must want to do his job for all it is worth or [a train wreck] may happen". The company agreed, and decided the best way to get enthusiastic staff was to pay its staff better than any other railway.

At this point, the trade unions had a tantrum. According to Ray Heibert's biography of Lee, the unions opposed the pay rise because, they argued, pay scales had to be set nationally for all the railways.

How generous of them.