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"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice" - Adam Smith

The supermarkets are killing off the independent petrol stations

Written by Tim Worstall | Tuesday 06 August 2013

A complaint from the independent petrol retailers that those dastardly supermarkets are killing off their business. Which I'm sure they are, opening larger stations, selling fuel at cost and so on. Given that this benefits the consumer long may it continue as well. I don't insist that they should not be allowed to complain about this: that's what trade associations are for. To push the interests of their members, just as unions do for their. Only that we don't have to pay all that much attention to such special pleading. However, they make one complaint that is worthy of closer examination. The supermarkets turn over their fuel faster (this being part of why they are more efficient) and this means that there's less stock actually on the forecourts of the country.

Based on the report, the Government concluded that "in the event of a total disruption to petrol and diesel supplies the retail sector holds up to eight days of fuel capacity to meet current demand". But the PRA was already highly critical of the Government's "grossly misleading" conclusions – even before it discovered it had understated the supermarkets' share of the market. Mr Madderson said DECC had misunderstood how the market works: "They are saying we have eight days capacity. In our view it's two to four days, especially if the supermarkets have a bigger market share than we thought."

Is this a problem? I don't know. Certainly I think I'd be slightly worried if I thought that the country had only 30 minutes of fuel on forecourts. What is the right number is I think is a matter of opinion not one of fact. I'd also posit that something that entirely stops the flow of fuel completely for more than two days is probably something that means we've got larger problems than whether we can drive to the shops.

But what interests me here is the other side of this story. So, let us agree, there is only 3 day's supply at the stations, not the 8 everyone thought. What's the implication of that?

Annual road transport usage of fuel seems to be around 40 million tonnes. 5 day's worth of that is some 500k tonnes, or in litres (assuming petrol is equal in density to water, which is close enough) and at a price of £1.35 a litre, that's some £675 million.

That is, in order to support the road transport system, supply it with fuel, this reduction in the stocks has led to that £675 million's worth of fuel not just sitting around in the system. The capital requirements to support the stocks in the system have therefore declined by exactly that £675 million. If you prefer, the amount of capital that has to be allocated to the transport fuel system has declined by that sum, a sum that can now be used to go off and do something more useful or interesting. Say, finding a cure for Simon Cowell (or is that a cure to Simon Cowell?).

And that's what I think is the interesting point here. OK, maybe 3 day's supply of fuel isn't enough, maybe it is. But there's always another side to these things. In this case, to insist that 8 days is available, someone, somewhere, has to find £675 million to finance that stock. I agree that it is possible that, in extremis, not having the fuel there could cause us all damage. But how much should we all be paying to make sure that greater supply is there? What is, if you like, the insurance premium we should be willing to cough up?

Most importantly, is that insurance premium worth the loss of all the other things we can do with that sum of capital?

As I say up top, I don't know what the correct answer is. But I would insist that this is the right way to consider the question. Increasing stocks at petrol stations might indeed be a nice idea: but it's not costless.

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Chart of the week: US household savings rate falls after deleveraging of recession

Written by Gabriel Stein | Tuesday 06 August 2013

Summary: Latest GDP revisions also boost household savings

What the chart shows: The chart shows US household savings as % of disposable income

Why is the chart important: The US Bureau of Economic Analysis has just published its most recent major GDP revision. These take place every five years, but the 2013 was more through-going than most, in two ways. First, investment in intellectual property (films, books etc) is now counted as capital expenditure. Second, pension savings is now included in the household savings rate. The revision does not change the past, but it provides a better picture of it. In the case of household savings, it helps explain how US households have managed to deleverage in the aftermath of the Great Recession. However, the recent trend is still for the savings rate to fall. Short-term, that is good news for the economy. Somewhat further out, it is a concern. 

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The future is shale!

Written by George Layton | Monday 05 August 2013

The UK Energy and Climate Change Committee has stated that shale gas will not be a "game changer" in the future of UK energy, but they are wrong; it will be. The recent British Geological Survey report pointed to 1,300 trillion cubic feet of reserves, twice previous estimates. A recent study by the Institute of Directors found that the shale gas industry could generate 74,000 jobs and could supply up to half the country’s gas needs by 2030. Furthermore it could also trigger an investment boom worth £3.7 billion a year.  Given the location of most of the reserves, it could also be hugely beneficial in reducing the north-south economic divide.

Shale gas reserves in North America can provide gas security to US and Canada for the next 100 years.  Shale gas released by 'fracking' has brought energy prices tumbling and helped trigger an economic upswing in the US, and is helping the US to become a net exporter of energy in the future.

Since gas puts out half the CO2 of coal, the switch to gas from coal-fired power stations is enabling the US to cut its emissions.  The UK achieved similar results when it began switching from coal to North Sea gas, until this was halted under Labour.  Shale gas is arriving just as North Sea supplies diminish.

Environmentalists have mounted a massive campaign against shale gas because they favour the vastly more expensive renewables.  Shale gas is indeed a fossil fuel, but is a relatively clean one in abundant supply.  Despite scare campaigns alleging water pollution, the US Department of Energy's latest report, based on a year's monitoring of fracking in Pennsylvania, found no pollution of water supplies or groundwater.  And the earth tremors claimed by environmentalists are debatable, but even if true are so minor that they are roughly on the level of a bus passing in the street.

Shale will have geopolitical effects, reducing the West's reliance on energy from potentially unstable sources such as the Middle East and Russia.  Saudi Prince Alwaleed warned his country last week to diversify its economy in the face of a falling demand for its oil as the shale revolution develops.  Shale offers us secure energy supplies as well as lower costs for our industry.  Many environmentalists are committed to the 'live more simply' mantra, and oppose shale because it provides the means for continued economic expansion.  They are correct.  It is a game changer.

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No taxation for representation

Written by Tim Worstall | Monday 05 August 2013

Yet another call for the political classes to tax us yet more in order to pay for the political classes:

And that makes the search for an alternative more plausible. Both Sir Hayden and, more recently, Sir Christopher Kelly, chairman of the committee on standards of public life, proposed additional taxpayer funding to make up the shortfall from a donations cap. Politicians ritually argue that the public will not like forking out for a system it does not trust. This now beginning to sound like an increasingly flimsy excuse – and a circular one. The present system actually fuels that distrust. Nor are the sums large: Sir Christopher proposed a £10,000 donations cap and an increased state contribution of £23m a year over five years – the cost of a first-class stamp for every taxpayer.

No, just no.

A political party is simply a private association of individuals banding together for mutual benefit. As such there is no call whatsoever for the taxpayer to fund them. The Conservative Party has no more claim on tax revenues than the Co-Operative does, Labour no more than Littlewoods. All four of those being private associations of individuals banding together for mutual assistance.

If the parties cannot raise the money they think they need (or more accurately, the cash they desire) from those who support them then they've no more right to everyone else's money than I do. Which leads to my proposed slogan: no taxation for representation.

Now, given that that's not actually going to go anywhere a more modest proposal. Let's really sell those titles, as we used to back when we did rule the world. And we've one beneift today as well: we can confer an hereditary peerage without that giving rise to the right to sit in the House of Lords. It would still be necessary to win an election (yes, I know, to foreigners this will sounds very strange but the only people who are actually elected to our upper house of the legislature are the hereditary peers) for such a creation to get there. So, offer each and every political party a settled number of titles to auction off. A couple of Earldoms, a handful of Viscountcies and a slew of Baronages. They cost absolutely nothing at all to make, can be sold for very good prices indeed and, as long as we make them all hereditaries, do not give the holder any power over the rest of us at all.

Why not? Lloyd George was a Liberal so this must indeed be a good and liberal policy, mustn't it?


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Of course we should stop subsidising arts degrees

Written by Tim Worstall | Sunday 04 August 2013

Not that we particularly do subsidise arts degrees, not in England we don't. Students now borrow to pay the course fees for the subjects they study which is as it should be. But some interesting research about why we shouldn't ever go back to subsidising arts degrees whatever else we do with tertiary education. The basic point being that hard and social science degrees contribute to economic growth. Arts degrees do not. The full paper is here but this is probably an easier summary.

Cristiano Antonelli and Claudio Fassio decided to open this Pandora box and concentrate on one impact: economic growth. They perform a cross-country study and take the number of graduates in each field as an indicator of academic output, and see where that leads us in terms of economic achievement. They make the distinction between engineering, hard, social, medical sciences, and humanities in a 11-year panel of 16 OECD countries. The horse race ends with two clear winners, engineering and social sciences, and two big losers, medical sciences and humanities, the latter having a significant negative contribution to growth.

The argument generally deployed is that having a better educated population increases economic growth: thus there should be subsidy to that education. Which is fine of course, but as this paper shows it does rather depend upon what sort of education produces the economic growth. And as we see, the social sciences and hard ones do indeed produce that growth and so there's an argument for subsidy. That the arts degrees do not produce that growth means that this particular argument for their subsidy fails.

But do note that last little part of it: arts degrees reduce economic growth. Quite why: well, have you ever actually looked at an arts degree syllabus these days? They might well instruct well on the importance of feminism to Jane Austen, say, but they do seem to misinform about everything else political and economic. Or it could be of course that it's just the opportunity costs: having intelligent people spending years arguing over the importance of feminism in Jane Austen is a drag on the economy when they could have been out designing bridges instead. Or even serving the coffees that their graduate degree will prepare them for.

But such gross cynicism aside this economic result does indeed lead to an interesting policy idea.

We're all familiar with the idea that there are externalities, that such externalities need to be corrected with the addition of a Pigou Tax. This is simply the flip side of the argument that positive externalities (like, say, the public good of economic growth coming from science education) should be subsidised. Those science and social science degrees produce that increase in economic growth which is indeed a public good worthy of subsidy. Those arts degrees produce a negative externality which must be corrected by a Pigou Tax.

At which point the correct policy is obvious: we should charge the arts students twice the normal fees in order to subsidise the science students. It's a win/ win situation I feel.


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Of course big business loves regulation

Written by Tim Worstall | Saturday 03 August 2013

An interesting little point made in the Telegraph:

In the debate on Britain’s relationship with the European Union, you hear two types of response from business leaders. The first, given generally by those who can afford to pay for large teams of lawyers, compliance officers and Brussels-based lobbyists, is one of tentative approval. The second, inevitably provided by the bosses of small and medium-sized enterprises where every penny must be accounted for and most members of staff have more than a single role, is one of resignation verging on outright hostility.

The point being that big business doesn't really mind regulation because it has the capability of dealing with it while small business hates it with a passion because it does not.

But it actually goes rather further than this. Big business positively delights in much regulation. To understand this we've got to be clear eyed in our appreciation of what the market is really all about. Capitalism, and big businesses are decidedly capitalist organisations, is indeed all about making profit. Get the most out of whatever it is that you're doing. It's the market, the competition that it allows, which is what tempers this this profit gouging. You can't charge what you like for a pint of beer because there's another pub around the corner. Or the supermarket and the couch in front of the telly. Or France sells beer to take home as well.

What regulation does is favour both the incumbents in any activity and also large companies in anytihng at all. For what worries business is not whether they're allowed to do something or not: but that other people will find a better way of doing it and thus compete. More regulation means that fewer upstarts can enter the market and any that do are hobbled by that regulation. The more regulation the more the current large companies can continue to be capitalist without having to worry about their practices being tempered by that market competition.

Which is, as I say, why large companies just love regulation. The problem here is of course that it's also large companies that do all the lobbying. Further, that it's the small and new companies that do most of the innovation and nearly all of the job creation. Meaning, in the end, that it's precisely because large companies so like regulation that we should have less of it.

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Postcode petrol prices

Written by Dr. Eamonn Butler | Friday 02 August 2013

Transporting fuel to Scottish islands is an expensive business. This in turn makes motoring on the islands more expensive. The UK government's solution? It gives a 5p/litre reduction on fuel duty on the islands. Which means millionaires who've retired to Arran enjoy a subsidy from poor motorists on the mainland.

So now everyone else wants to get in on the act. There is an election coming up, of course, and now people on 'remote' parts of the mainland – Devon, Northumberland, North Yorkshire and Wales could be in line for the same cut. The Treasury is asking petrol retailers and customers in 25 Counties to provide details of their prices. Well, we know what they are going to say, don't we?

Don't get me wrong. I'm in favour of any tax reduction of any size on any thing at any time in any place. Taxes are far too high. But as well as being low, taxes should be simple. If you are going to tax fuel, or alcohol or incomes or anything else, tax them equally: don't try to use taxes for social engineering. The long-run results won't be happy.

Back in the 1970s, when the UK gave subsidies to 'assisted areas' that were thought to be in need of special support. Of course, everyone wanted the subsidy, and before long, the entire country was one vast 'assisted area' apart from a small pocket in the South East. That is where this kind of me-too politics takes us.

Politicians should not be empowered to favour any particular groups. They should treat us all equally – if we allow them to discriminate, the opportunities for corruption are huge. If people choose to live in remote places, they need to accept the costs of that – along with the benefits, which might include scenery, solitude, simplicity and much else. We should not tax them for the latter and should not subsidise them for the former.

By manipulating the tax system, politicians skew the decisions people make about where they live and what they do. Bit by bit, we end up gravitating to the subsidised places and working in the subsidised industries – instead of going to where we can be most productive in the most productive industries. And then we wonder why the country is broke.

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Government in doing something sensible shocker

Written by Tim Worstall | Friday 02 August 2013

Sadly though it's not the government that we groan under the yoke of, but the Australian one that has just done something extremely sensible. You may or may not recall that a few weeks back various Oz MPs were getting very hot under the collar about why various tech products cost a lot more there than they do in other countries. They called in the execs and had at them and various fairly weak justifications were offered. Transport costs, small market, high costs of infratstucture and so on. No one quite had the chutzpah to point out that they were simply profit maximising businesses. They charged more in Australia because they could charge more there and that's simply it.

It does appear though that the MPs uderstood what they weren't directly told, for:

Acknowledging that companies have the right to decide the pricing of their own products, the committee made a number of recommendations to address the price of goods in Australia.

Ooooh! What?

It wants the import restrictions in the Copyright Act, 1968 removed and add a clause to allow consumers to circumvent geoblocking to ensure they're getting the best price. It also wants to teach Australian consumers how to get around geoblocking and provide more access to technologies that allow them to do so. Needless to say they will also need educating on how far Australian Consumer Law allows them to go on this.

• If companies do not agree to lift geoblocking, or to give consumers the tools they need to circumvent it, the committee recommended enacting a ban on geoblocking "as an option of last resort". It also recommends voiding any law which seeks to enforce geoblocking.

Blimey, can I emigrate? Politicians make recommendations, based upon the evidence and further, recommendations that will actually solve the problem?

For the companies charge higher prices because they can. Remove their ability to do so by removing the artificial restrictions upon consumers and they will no longer be able to charge those higher prices. Thus they won't.

Isn't this so joyfully different from our own dear Margaret, Lady Hodge, and her practice of offering soundbites without demonstrating any understanding of the basic underlying problem?

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You really cannot just plan economies you know

Written by Tim Worstall | Tuesday 30 July 2013

It's one of the standard conceits that the man with a plan can make society better for us all. The standard response to this conceit is Hayek's point, that no one can have enough information in sufficient time to be able to make or manage such a plan. That's why we have to use markets as they're the only information processing and calculation engine we've got that is capable of doing the job. There are, of course, people who prefer to shout that Hayek's all wet and that their plan would undoubtedly work. Fortunately we've already run the experiment, we generally call it the 20th century, and we now know that Hayek was indeed right.

All of which leads to this interesting little tale:

Migration statistics are "little better than a best guess" and probably understate immigration to the UK, a parliamentary report has revealed. With immigration again set to be a key battleground during the next election, a report released today by the Public Administration Select Committee warns that the statistics are not fit for purpose.

Because of the unreliability of the figures, the report adds, the Government should aim for a target of 50,000 if it wants to reduce immigration to under 100,000 by 2015. Estimates of immigration, emigration and net migration are primarily based on a sample of 800,000 people interviewed at ports and airports each year, known as the International Passenger Survey. But only about 5,000 of those tend to be migrants and, in addition, the report comments, these "may be reticent to give full and frank answers, to say the least".

This means that the Office for National Statistics and the Home Office are producing "blunt instruments for measuring, managing, and understanding migration to and from the UK", which do not, the report says, measure the impact of migration on local areas, the social and economic impacts of migration or the effects of immigration policy.

Or as we might put it, we cannot "manage" immigration or the effects of it because we've got no clue at all about how much of it there is. We don't, in fact, know how many people there are in the country, let alone how many of them are native born (it's actually Polly Toynbee who has been saying for years that sewage processing requirements show that there's more people in the country than there are on the books). In such circumstances we simply cannot go about trying to manage things like housing: given that we've no clue of the number of people we can't decide how many houses and or flats there should be. We can only start to look at what the markets are telling us: prices are rising, in fact are at Ungodly levels, and so we need to have more houses and or flats.

How many more? I don't know, you don't know and the government can't possibly know. Just more until we stop having house price inflation.

I should end here with a clarion call to something or other. But I'm not sure that this rises to that level: perhaps a clarinet call. We really have run that experiment about planning and markets. Given that we've received the results, can we please start paying attention to them? We simply do not have, cannot have, the information we need to plan things. That's why we have to use markets.

Simples really, isn't it?

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Modern religion is just so confusing

Written by Tim Worstall | Sunday 28 July 2013

You know I'm sure that somewhere in the foundational documents of Christianity somewhere there's a story about how the money lenders and the Temple aren't supposed to be too closely entwined. I think that was one of the stories beaten into me over those years at the hands of the monks at least, vague memories of shouting and tables being over turned as our man JC told them to get out of his father's house. But here we have the new Archbish of Cantab insisting that the Church of England should actually become the money lenders. Shrug, I guess tempus fugit after all. Jan also had a joke about this idea as well.

However, underneath the inherent silliness is something much more welcome, a definite antidote to the increasingly shrill calls from the likes of Stella Creasey that payday lending must be abolished by legislative fiat. For what the Rev Welby is actually saying is that he wants to drive these lenders out of business by competing against them, not by hoodwinking credulous MPs into stealing away someone's livelihood. Welby is insisting that such short term and low value lending can be done at much lower prices than the current companies manage it. This would be to the benefit of the consumer, as competition always is, and this would thus be a good thing. And we around here do have a habit of welcoming goods things, whatever direction they arrive from.

So, after the sniggers have died away, full marks to Cantab.

Except for just one little detail: I'm entirely unconvinced that it will indeed be possible to offer such low value and short term loans at rates appreciably different from the current providers. It's absolutely possible to offer larger sums at lower rates: it's also entirely possible to offer longer terms at lower rates. But there's an inherent problem in small sums for short terms. There's some overhead to the making of any loan. Some irreducible minimum that it costs to make the decision to grant or not grant the facility. And the shorter the time period and the lower the sum then the more that minimum cost will be as a percentage. And, given the way that APR works, it becomes some vast percentage when a 1 week loan is calculated as if it is a series of 52 one week ones (which is pretty much what APR does).

I've seen a report that Goodwill (think charity shops) tried this in hte US and found that APr was well over 130% without even charging interest, let alone trying to make a profit. So I wish the CoE all the luck in trying to compete in this payday loans market. But I do think that they're not going to get very far. Simply because the costs of lending small sums for short time periods are inherently high.

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