Who's in control?

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altAlthough the political show of resignations, reshuffles and elections is damaging Gordon Brown and the Labour party to their core, there needs to be a rapid solution or conclusion if Britain is to move forward 

At the moment we are a country lacking any clear government, leadership or direction. Gordon Brown has taken his hands off the helm and we are heading straight for shallow water. We clearly need a change of government, in a recent poll 66% of people said they would like an immediate election if Gordon Brown stood down. However, we live in a country where the wishes of the people have little part to play in governance. We are currently in limbo – if there was a terrorist attack in London or a flash flood, would the government really be in a position to respond? Party politics is clearly a major distraction from fixing past mistakes.

It would be easy to think that as long the Labour party are concentrating on damaging each other at least they aren’t focussing on damaging us. But we currently have a government wielding huge power but with no clear idea what to do with it. If there is one thing we have learnt from the past month, it is that we need to limit the power of the government and introduce much greater levels of transparency and accountability.

Blog Review 783

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How confused are farmers getting over the dairy market?

And how bad a deal are we getting from the PFI schemes?

There's also a problem with having a committee deciding what medical treatments the NHS will pay for: clearly, those who provide certain medical services will compete to get on that committee.

Gordon Brown does seem to have a little of the control freak in him, no?

I know John Redwood Mr. Purnell and you are no John Redwood.

Booze in inflation adjusted money terms is about what is was in 1909 and yet a great deal cheaper compared to average earnings. Except for Bordeaux, strangely.

And finally, the most useful political website of our time. isgordonbrownstillprimeminister.com.

Online transparency

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altThe Public Accounts Committee of the House of Commons is annoyed that the BBC won't open its accounts to deeper public scrutiny. Apparently the Beeb has gone to some lengths to thwart the National Audit Office – the official scrutineer of the public finances – to prevent the publication of the salaries it pays to its top presenters.

In a BBC News interview on 11 May, Labour Peer Lord Foulkes turned on presenter Carrie Gracie, forcing her to reveal she was paid £92,000 a year – one-and-a-half times the salary of a Member of Parliament. But then she probably doesn't have a second home allowance. Or does she? I think we should be told. (For the record, I think Carrie Gracie is about six times more useful than the average MP, so she's actually pretty good value for money by government budget standards.)

The BBC is a public corporation, funded by £3,000m a year of taxpayers' money. Yes, we want to maintain its independence – though frankly, it would have far more independence if it was privatized and did not have to keep the politicians sweet by laying on all those 'public interest' broadcasts whose sole function is to allow politicians to preen themselves in front of the political junkies who watch this kind of stuff. But taxpayers have a right to know how public bodies are spending their money. That means all public bodies – Parliament, government departments, local authorities – and quangos.

If we're forced to pay taxes, we should at least have the right to know how they're spent. Who is paying how much of our cash to whom? It's a simple question. And the easy way to answer it is to post on the internet every cheque which government and public bodies issue. Then concerned citizens and the media can spot irregularities. MPs being paid for duck islands? Council bosses giving lucrative contracts to their in-laws? Quangos spending more on PR and offices than on their job? Online transparency should be a basic principle of public finance.

Daily Mail: The lump(en) theory of wealth

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One of the more persistent fallacies in economics is “Lump Theory": that there is only so much to go around and the question is how it is share it.

The most common example of this is the Lump Theory of Labour, where new entrants to the job market are alleged to take away work from existing workers. This is usually used to bash immigrants, though it has in the past been used to argue for the Closed Shop and for restricting labour-market participation on grounds of gender, age and race.

Another example is what we might call the Lump Theory of Wealth, the Mercantilist belief that money leaving the country means less wealth for citizens. This ignores the rather simple fact that pounds are pieces of paper whereas the stuff they buy is usually far more useful: are we really poorer if we give a Chinaman twenty five pieces of paper, each of which says “Ten Pounds" on it, and he gives us a television? It also ignores the fact that pounds can only be spent in the UK, so eventually they must make their way back here either to buy our exports or as loans to government, business or citizens.

Monday’s Daily Mail had a textbook example of this in the article 'Immigrants send home £4.9m a day'. According to the Mail, “The economy is losing £4.9million every day because of the huge sums immigrants send home to their relatives..." Migrationwatch, the anti-immigration lobby group, suggested that this is enough to build two new aircraft carriers and argued that “claims that there are only positive economic benefits from mass immigration are clearly untrue."

All exchanges in a free society are voluntary; both parties benefit. If companies are paying foreign workers £4.9m a day (for the sake of argument let us ignore the difference between wages and remittances), it must be because companies (and therefore Britain) must be getting something that in the companies’ judgement is worth more than £4.9m. For example, if those foreigners were employed in ship yards, they would get £4.9m a day and we would get (say) Andrew Green’s two aircraft carriers. Thus the labour that these migrants are selling to the UK is beneficial to us.

What is more, those £4.9m cannot be spent abroad: the pound is not legal tender there. At some point the pound must return to the UK, either stimulating exports or providing much-needed credit to UK industry or government. Thus, having gained from the labour of the migrant, UK businesses then gain from the desire of his family to import goods or lend money for profit.

Sadly, this simple economic logic is beyond the lumpen intellect of Migrationwatch and the Daily Mail. To them, as to the Mercantilists against whom Adam Smith railed 233 years ago, the wealth of nations is a zero-sum game expressed by the flow of money.

End specialist mobile telecoms regulation

The report identifies a number of specific examples of a heavy-handed regulatory approach, including:

  • Micro-management of customer service: Ofcom is asking operators to gather and publicise information of no interest to customers
  • Efforts to improve price transparency on national numbers that may lead to Ofcom setting the price of individual calls
  • Slow regulator reaction over misselling complaints – industry self-regulation reduced complaints by 95% while Ofcom were still drafting their consultation
  • Attempts to reduce the time to port a number between operators to less than 48 hours, even though this timescale is satisfactory for consumers
  • Demanding mobile providers deliver 100% mobile coverage across the UK, even though this would take resources away from investment in new technology and improved services.

The report sets out a series of recommendations which emphasise the ample opportunities for Ofcom to withdraw from detailed regulation. With this goal in mind the report recommends that the regulator should prepare a timetable for phased regulatory withdrawal across the sector. In this context, it is important to note that the recently strengthened EU Consumer Rights Directive provides an unprecedented opportunity to wind up sector-specific consumer rights regulation and replace it with a set of robust consumer rights based on the new EU Directive.

Accordingly, the report calls for a systematic toolkit to be developed in order to stimulate greater competition and ensure that consumers enjoy similar rights across a raft of sectors, such as energy, telecommunications and water services. This should be a welcome development for consumers who should find such an overhauled system easier to use and consistent across the entire range of goods and services offered in the UK retail market.

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altIn a new study published this week the Adam Smith Institute’s Senior Fellow Keith Boyfield argues that regulation of mobile telephones in the UK is far too detailed and cramps innovation. It needs to be rolled back to allow this highly successful industry to adapt to the next wave of technological change. The report, entitled Regulating Mobile Phones: A fresh look, published by the European Policy Forum, points out that the mobile sector is characterised by a wide raft of suppliers who have delivered consumer satisfaction rating of 94% - far higher than other markets such as rail, water and energy. They have also provided tremendous value for money: prices have tumbled by 17% a year over the last five years.

Why then is Ofcom, the sector regulator, showing increasing signs of wanting to tighten its regulatory hold on the mobile telecoms market? It is currently in the middle of a Mobile Sector Assessment exercise aimed at reviewing its whole approach to regulation. However, there are few indications that it is seeking to withdraw from regulatory intervention in the market.

Keith’s study identifies a number of clear disadvantages in Ofcom’s current approach and the damage to the market caused by unnecessary regulation. Ofcom’s micro regulatory management has limited innovation by reducing competitive advantage; it has further limited the incentive to invest in new products and services. Ofcom’s regulatory approach has tended to focus too much on the concerns of a few voices rather than the bulk of consumers. As a result, overall costs – and prices – are higher than they could be if market mechanisms were unshackled. ‘Relations between the sector and the regulator do not reflect the achievements of the market’, says Keith. “Increasingly regulation is a hindrance to the consumer. The pace of technological change in the sector is not slowing down, providers must continue to adapt. Heavy-handed regulation weakens incentives for investment and opportunities for innovation.’

He adds, ‘Ofcom needs to adopt best practice in regulation – which is to step back where competition is delivering for the consumer. Regulation will always be a second-best approach to meeting consumer needs. Successful sectors often outgrow the regulator. We no longer have specialist regulation of fixed line telecoms, the time has come to withdraw from mobile specialist regulation as well.’

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Blog Review 782

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Strange really, incumbent politicians seem to be the only people who don't want to see market structures brought into politics.

If the economy is recovering now and we haven't spent the stimulus, then it can't be the stimulus which is recovering the economy, correct?

A more considered and lengthy consideration of the same problem.

Price discrimination is a quite wondrous thing.

Forget the policy for a moment, wouldn't you like a politician with this sort of comeback?

The truth about technical analysis.

And finally, Netsmith never needed this. Who hands in essays anyway?

UK Water – The moment of truth beckons

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altIn recent days, the major quoted water companies – Northumbrian, Pennon (South West), Severn Trent and United Utilities (North West) – have announced their full-year results for 2008/09.

Whilst there were few surprises, there were concerns on several fronts. The recession has reduced metered consumption by industry, a factor that adversely affected Severn Trent in particular. Moreover, higher energy and pension costs have also reduced the sector’s profits.

The reality, though, is that - like Banquo’s ghost - these results were overshadowed by Ofwat’s forthcoming five-year regulatory review.

On 23rd July, Ofwat will make its eagerly awaited announcement about the financial projections for the water sector during the 2010/15 five-year period.

Central to Ofwat’s calculations will be the projected capital expenditure total, which is likely to be close to £20 billion – an increase on the current five-year investment cost.

For investors, the most critical figure will be Ofwat’s assumed range for the Weighted Average Cost of Capital (WACC), which is key to determining financial returns.

In the 2005/10 period, Ofwat assumed a 5.1% post-tax WACC, which was widely regarded as generous; it has been a central pillar in sustaining water sector valuations subsequently.

Previously, Ofwat had promised a ‘far lower’ WACC this time round. However, the credit crisis and a fundamental re-alignment of bond yields - notwithstanding massive UK gilt issuance plans - have made the task of setting a five-year WACC very challenging.

Arcane though the arithmetic may seem, water consumers are directly affected by Ofwat’s forthcoming decisions – they will set water charges for the next five years. With the exception of 2000/01, domestic water charges have risen almost inexorably since privatization in 1989.

Hence, there are many interested parties waiting on Ofwat’s 23rd July announcement.