The tragedy of the £80,000 broadband connection bill

There's a reason economics is called the dismal science - it makes clear some uncomfortable truths. For example, this complaint about an £80,000 bill to be connected to broadband. If it's not worth paying that cost for the benefits to be gained then it's not worth the cost for the benefit, is it? 

The owners of one of rural Scotland’s most popular hotels for walkers and climbers has attacked the dire speed of broadband it can access after being asked to pay £80,000 to get a good connection.

Lesley McArthur, a partner in the Glen Clova Hotel in Angus, said it is forced to make do with an internet speed of only 0.5mbps and the connection disappears altogether if more than one guest decides to log on.

She argued that the remote hotel, which attracts hill walkers across the UK, makes a significant contribution to the local economy but in September was quoted the “absolutely ridiculous” sum of £80,000 by BT for a fibre-optic line.

Although Nicola Sturgeon has pledged that every premises will have superfast broadband with a speed of 30mbps by 2021, she said that the hotel could have lost “a lot of business” by the time this happens.

Let us make the - possibly unwarranted for who knows about BT's pricing but this is going to be true of at least some isolated places within our islands as it is true of electricity supply, piped water or sewage connections - assumption that £80,000 is the true cost. 

The hotel is stating that it's not worth their paying that bill for the economic benefits it brings. There is no spillover effect here, no value of a connection which they cannot capture. Thus, if it's not worth their paying the bill it's not worth anyone else doing so either.

That is, we've not changed the cost benefit analysis by suggesting that the taxpayer should pick up the bill instead. Or BT shareholders perhaps, through a universal service provision. Running broadband, with current technology, to every place out in the boonies (and looking at the map, this really is the boonies) simply isn't worth it. It makes us all poorer, the value added is less than the cost.

So, let's not do it, whoever is paying for it and however. Why would we want to make ourselves generally poorer? 

Down with the killjoys!

Public health campaigners are in many ways the modern version of religious puritans. Or at least, that’s the case according to Christopher Snowdon in his new book Killjoys, published earlier this month by the Institute of Economic Affairs.

In the book’s opening chapters, Snowdon outlines the philosophical basis for opposing paternalism of all varieties. He begins with a brief exposition of John Stuart Mill’s utilitarian ‘harm principle’: the idea that the only justification for interfering with the liberty of others is in order to prevent harm to others. It thus follows that coercing someone purely for their own good is unwarranted, according to Mill. There are various arguments used to defend the harm principle, ranging from the idea that “promoting liberty will foster originality” to the claim that “paternalism drains people of their vitality by making decisions for them.” But, in Snowdon’s view, these are not the strongest arguments for adopting a classical liberal view of paternalism:

Mill’s simplest and strongest case for individual liberty arrives...when he writes that a person’s ‘own mode of laying out his existence is the best, not because it is the best in itself, but because it is his own mode’. Since people have different tastes and preferences, it is undesirable for others, even if they are the majority, to impose foreign preferences upon them.

The vast majority of economists lie in the same utilitarian tradition as Mill, and many accept the importance of individual freedom—not paternalism—as a means of maximising overall wellbeing:

...economists believe that markets produce the best outcomes if competition exists and if choices are voluntary. For this, consumers must be reasonably well informed and reasonably rational. Like John Stuart Mill, mainstream economists assume that the average consumer is basically rational, which is to say he generally acts in accordance with his preferences.  

The majority of Killjoys applies this classical liberal approach to contemporary paternalism and the justifications employed by the killjoys who support it. It tackles soft paternalism (sometimes called ‘nudge’ policy), hard paternalism, and finally the most prominent form of paternalism in the contemporary world: “public health” paternalism.

‘Nudge’ paternalism

Snowdon’s evaluation of nudge policy (first popularized by Richard Thaler and Cass Sunstein's 2008 book Nudge) is fairly positive, despite his misgivings about some of work in behavioural economics underpinning it. He appears cautiously optimistic about efforts to correct our cognitive biases by altering ‘choice architecture’ (e.g. adding organ donation questions to driving licence forms or ensuring faster payment of income tax by reminding taxpayers that their money goes to public services). After all, this is simply applying common private sector practices to the public sector in order to make it more effective:

When government action is required for the nudge, it is when the government is already involved. Tax collection, organ donation and driving licences are all within state control. If they can be made more effective and efficient by using the same persuasive techniques  that are second nature in the private sector, why not do so?

However, Snowdon also highlights a key reason to view such soft paternalism with a critical eye. Since “most governments are more paternalistic and less libertarian than the nudge theorists”, there is a serious possibility that such interventions form the basis for a slippery slope into more coercive forms of paternalism.

‘Hard’ paternalism

Unsurprisingly, Snowdon views hard paternalism in a far less positive light. Using Sarah Conly’s unusually candid book Against Autonomy: Justifying Coercive Paternalism as a foil, he demolishes the arguments of those who would ban cigarettes, ban trans fats, increase required savings and even potentially ban soda. Conly’s key argument rests on the idea that humans all share certain universal goals: namely health and financial security. Think like an economist, and you recognize this as a nonsensical justification for coercive paternalism:

If we judged people’s desires by their behaviour – as economists do – we would not conclude that pristine health is their only goal. Even stated preferences do not imply that people prioritise a long life over all other considerations. When The Who sang ‘I hope I die before I get old’ in 1965 they were reflecting a stated preference for living fast and dying young that is not uncommon. A young man who leads an unhealthy or risk-taking lifestyle while claiming to have little or no interest in getting old is being consistent in his stated and revealed preferences.

Conly recognizes the existence of such trade-offs, qualifying her paternalism with the idea that the benefits of an intervention must exceed the costs. But, as Snowdon highlights, her cost-benefit analysis is vague and arbitrary. Like many paternalists, subjective valuation trumps consistent application of her principles:

The more one reads of the paternalism literature, the more one is struck by ad hoc exceptions being made to supposedly universal principles. That these exemptions tend to reflect the public mood of the day only confirms Mill’s fears about the tyranny of the  majority. Smoking and eating dominate both Against Autonomy and Sunstein’s Why Nudge? as if they were in a separate class of risky pursuits. When it comes to activities that pose an acute risk of death at a young age, such as motorcycling and mountaineering, paternalists have little to say other than that participants should, perhaps, be forced to wear a helmet. There must be a suspicion that dangerous sports get a free pass because they are seen as daring, unusual and physically demanding whereas drinking, smoking and drug  taking are undemanding, common and intoxicating.

Snowdon concludes the chapter with an defence of ‘slippery slope’ concerns, using mandatory seatbelt laws as one such example. Such minor infringements of the harm principle aren’t particularly destructive in themselves, but they do “change public perception about the objectives of criminal law.”

‘Public health’ paternalism

According to Killjoys, the modern ‘public health’ lobby is just an updated form of the groundless puritanical moralism that Mill sought to combat in his day. Snowdon describes it as “quasi-utilitarian” in its rhetoric, but decidedly not utilitarian in practice. After all, a philosophy that aims to maximise the length of our lives is not the same as one that aims to maximise satisfaction of our rich tapestry of individual preferences:

...‘public health’ paternalism cannot be justified by welfare economics or utilitarianism. It is simply a form of ends paternalism in which health and longevity are assumed to be overriding goals.

The case for public health interventions is clearly strongest when there is no alternative to collective action: “tackling health risks in the share environment which cannot be controlled by the individual, such as air pollution, or those involving people (or animals) who carry infectious diseases.” But the public health lobby has experienced significant mission creep in recent decades:

Since the 1970s...the scope of public health action has moved beyond hygiene and contagious disease to target self-regarding personal behaviour. As Richard A. Epstein explains, the modern ‘public health’ movement ‘treats any health issue as one of public health so long as it affects large numbers of individuals’.

Snowdon is at his strongest when analyzing the politics of public health paternalism. He reveals the different strategies used to curtail individual freedom in the name of keeping us alive longer:

Being a political movement, the literature of ‘public health’ paternalism differs from that  of the academic texts discussed in earlier chapters in two important respects. Firstly, it tends to focus on short-term policy objectives rather than present a full vision of what it thinks society should look like. Long-term objectives are rarely made public, perhaps because the logical outcomes are so extreme that they would alarm the median voter. Only recently, for example, has the goal of cigarette prohibition been openly discussed in the ‘public health’ literature despite it being the only natural conclusion of the anti-smoking crusade.

Appeals to compensating for negative externalities are also exposed as creeping paternalism:

That negative externalities are used by paternalists as an excuse for interference can be  seen in the way they demand taxes be set far higher than the Pigouvian rate [the rate at which the cost of negative externalities are compensated for] and demand excessive regulatory responses to questionable externalities.

He also tackles anti-advertising crusades based on general anti-capitalist hostility to free markets, and various other methods employed by the public health lobby to forcibly impose their own vision of the good life on the rest of us. If you’re going to read just one chapter of the book, make it this one.

Conclusion

Following a section exploring the harms of paternalism—higher costs, substitution effects, black markets, in some cases unintended consequences of poorer health—Snowdon devotes the final chapter of Killjoys to describing effective, welfare-enhancing, classical liberal alternatives to paternalism. More education, Pigouvian taxes, and creating an environment conducive to innovation in harm reduction are all key pillars of this strategy.

Although I didn’t explicitly call myself a libertarian until I was 16, I first felt libertarian after thinking about the smoking ban when I was a lot younger. Back then, my views were based on a purely instinctive disdain for those who think they know how I should live my life better than I do. Many others share this attitude towards different forms of paternalism, and Killjoys gives them the intellectual ammunition to resist modern-day puritans. It’s also a solid introduction to applied economics and looking at the world through utilitarian lens.

You can read Killjoys on the IEA website here, or order the book here.

As we've been saying, there is no Brexit divorce bill

As we've pointed out before there is no such thing as the Brexit divorce bill. This is not to take sides in the current argument - although some of us are known to be highly partial, even prejudiced, upon the subject - it is to point out a basic economic, even accounting, point.

Sunk costs are sunk costs and they do not and therefore should not influence our decisions. This is akin to probability. Before we throw a normal die there is a 1 in 6 chance of any one number. After we have done so then the result has a probability of 1. It has happened. So it is with sunk costs.

Whatever the number is, whether it's €100 billion or whatever change we deign to toss into into the EU's will politic for food begging cup, this is still the wrong answer: 

But those remainers who feel no obligation to defend this government have every right to be as appalled by this £50bn bill as Farage and co. They – we – can see that it’s necessary for a club member to honour their debts as they leave after 44 years of membership. But, boy, what an unforgivable waste of money.

For let’s remind ourselves of the basic truth here. We’ll be paying this money for the privilege of not being in the European club.

This is not true in the slightest. Recall what the EU's position is. You have agreed to pay this as a part of your membership. If you leave you should still pay the amount you agreed to pay.

OK. Or maybe not OK to taste. But quite obviously, if we pay whether we go or stay then it's not a cost of either going or staying, is it? It's a sunk cost, a result of decisions taken in the past and decisions made now won't alter it in the slightest. 

It is true that leaving means we're not signing up to a continual stream of such future payments. But meeting our current contractual obligations is a sunk cost, one that we'll have to pay whatever. It's thus not a useful fact to include in our decision process, just because the decision either way makes no difference to us.

Yes, really, sunk costs are sunk costs. 

Why are Industrial Strategies always such stinkers?

The British Government has announced its Industrial Strategy. The problem being that it's the same as everyone elses' industrial strategy ever. A rag bag of whatever is thought to be fashionable or politically appealing at the time with nary a hint of any actual strategy to it.

Now it's entirely true that we're opposed to the very idea, insisting as we do that the structure of the economy is something emergent from the interactions of people within it. But even so this latest one is a stinker.

For example, we're told that the entire nation is going to be wired up to 5G, there will be superfast broadband everywhere. OK. We're also told that there will be a superfast rail network covering the country. Entirely missing the already proven point, that internet access everywhere destroys the economic case for fast trains. 

Yes, we do already know this - they've already been told to go back and do the numbers for HS2 again.

To explain for those who don't know. In a cost benefit analysis the value of a faster train set is the time saved by those travelling upon it. Business travel is assigned a significantly higher value per hour of travel time saved than leisure. On the grounds that if business types were not travelling to do business they would be in an office somewhere doing business. We wouldn't swear to these figures but £50 to £60 an hour for business types, £10 to £12 for leisure travel is about right.

The economic case for higher speed trains depends very heavily on those higher values for business travel. Both the values and the number of people.

But here's the catch - those numbers come from how the world was decades ago. Including the assumption that being on a train means being unable to do business, one can only sit there travelling to do business. No one who has actually been in a first class compartment in the past decade or two can possibly believe that this is how people work today. Mobile phones, then mobile internet (yes, trains do have it these days) have entirely changed that. Work is done on the move. In fact, scratch a regular traveller and you might well find an agreement that travel time is more productive these days.

Thus the major (and yes, really, it is *the* major) benefit in our cost benefit analysis of fast train sets does not exist. 

That is, if we wire the country so that the internet is available anywhere and anywhen then we've entirely destroyed the economic case for fast train sets. 

Which brings us back to industrial strategies. The claimed argument in favour of them is that they allow joined up government and planning. Yet in practice they always, but always, include stinkers like this. We must spend tens, if not hundreds, of billions on fast train sets when we've just made them redundant by wiring the country instead. This is not big, not clever and not joined up.

It is, instead, just a repeat of the ragbag of the ideas generally thought to be fashionable or politically appealing.

Better, we are certain, to leave the economy to be emergent from the interactions of the people within it than insisting on spraying the wealth of the nation up against the wall in this manner.

Let's stress about our banks a little bit more shall we?

Earlier this morning the Bank of England released the results of its latest set of stress tests for the 7 big UK financial institutions.

Having been up much of the night for a BBC Live 5 interview at 5:30, I've only had time to do a quick take and will leave a proper analysis for another time. But in the meantime, consider this from the Exec Summary:

"The economic scenario in the test is more severe than the global financial
crisis. Significant improvements in asset quality since the crisis mean that
the loss rate on banks’ loans in the stress test is the same as in the financial
crisis. In the test, banks incur losses of around £50 billion in the first two
years of the stress. This scale of loss, relative to their assets, would have
wiped out the common equity capital base of the UK banking system ten
years ago."

The stress is more severe than the GFC? Losses from the GFC were half a trillion, maybe
more. So a stress more severe than the GFC produces a tenth of the losses of the GFC?

"The stress test shows these losses can now be absorbed within the buffers of
capital banks have on top of their minimum requirements.

"Capital positions have strengthened considerably in the past decade. Banks
started the test with … a Tier 1 riskweighted capital ratio of 16.4%. The
aggregate common equity Tier 1 (CET1) ratio was 13.4% — three times
stronger than a decade ago."

Capital ratios based on the RWA denominator are meaningless.

"Even after the severe losses in the test scenario, the participating banks
would, in aggregate, have a Tier 1 leverage ratio of 4.3% …"

Many experts suggest that we should have minimum of at least 15% and Lord King in his memoirs suggests that a core capital to assets ratio of 10% would be a good start.

An increase in book value capital is one thing, but a decrease in market-value capital is another. In market value terms, banks have less capital than before the GFC.

Let’s take the BoE results at face value. Their best stress tests say now that all UK banks would pass their standard.

For them Barclays has a stressed leverage ratio of 3.6%. Pass standard also 3.6%. By my best estimate, Barclays’ market value leverage ratio is well under 2%.

RBS, perennial problem child, has a stressed leverage ratio of 4.0%. Big change from last year’s 2.9%. But it hasn't returned a dividend in ten years. By my estimate, its leverage is well under 3% and could well be much lower.

Santander UK: their stressed leverage ratio 3.3%, while the pass standard is 3.25%.

Last but not least, we should remember Lloyds and Nationwide: each with huge real estate portfolios–let’s hope house prices don’t fall!

Misconduct costs are given as 0.6 percentage points. That is a lot. Remind me, how many of those responsible for the great financial crisis of the last decade are in jail?

John McDonnell tells us that we'll all make massive profits from government spending

There are two - useful anyway - possible responses to this latest assertion of John McDonnell. One is hollow laughter, the second is a more robust stream of Anglo Saxon. For what he's saying is that it doesn't really matter what government spends borrowed money upon, it's all still bound to make us richer.

Well, yes.

By focusing on the cost of government borrowing (currently close to an all-time low, thanks to tiny interest rates) rather than the enormous social and financial returns on investing that money, the right creates a narrative that investment costs society rather than benefits it.

Lurking behind this is an assumption that a government cannot invest productively – the belief that government borrowing is akin to burning money. This is nonsense used to support the economic approach that has led our country to this pass. Very clearly, government investment can and should be used to support economic growth, as the OECD and others recommend – as indeed this Tory government, in some small way, is coming to recognise, committing a small amount of borrowing for investment. The meaningful question is whether that investment is wise, given the costs – rather than presuming that only costs exist.

Or as he's expanded upon:

Asked by BBC Radio 4’s Today presenter Mishal Husain how much extra it would cost to service public debt under Labour, McDonnell would not give a figure, saying extra borrowing would “pay for itself”.

The problem with this argument is that it is nonsense.

We can, dependent upon how Keynesian we want to be, make the argument that in a depression and the like then government spending upon near anything can make us all richer. It's not a view we subscribe to particularly but we'll acknowledge that it's out there. That isn't where we are though, is it? We're at or at least about full employment, there's little to no spare capacity in the economy. Thus a simple and pure increase in spending isn't the answer to whatever remaining problems we have - that would just cause inflation.

What is necessary for McDonnell's argument is that whatever the borrowing is spent upon is worth more than the cost of the borrowing. For purists we should also be insisting that it creates more value than alternative uses of the same money - opportunity costs or crowding out. This is possible, certainly. The amount spent upon enforcing property rights is the very basis of our having a functioning economy at all thus it's obviously true that some at least government spending passes this test.

But this isn't the hurdle which must be leapt. Rather, we need to know that the marginal spending will pass it. At which point we might look at the two major infrastructure projects currently under discussion, HS2 and the Swansea Lagoon. Both of which fail their cost benefit analyses. That is, they make us poorer, not richer. As they do so they clearly and obviously do not manage to pay back their construction costs, let alone the interest on the borrowings to finance them.

In the past this was also not true of the Edinburgh tram system, the Humber Bridge, the Tanzanian ground nut scheme and that multitude of other bright ideas that the political process has spent our money upon.

It is indeed theoretically possible that government can add value. It even does so, which is why we continue to have it. We've little to no evidence that this is true of the various building sets that politicians love so much. Therefore, how about not spending our money upon them? 

After all the private sector will already be doing those things that are clearly and obviously identifiable as profitable....

Things not to do: Introduce socialism

The claim is that socialism would bring about a fairer society than our present one. Society could indeed be made fairer, but socialism is not the way to do it, and never has been. Whenever socialism has been tried it has involved compulsion, as it attempts to make people behave in ways they would not freely choose to do.

Socialism has always led to economic deprivation and shortages. Markets allocate resources according to demand and anticipated demand, whereas socialism attempts to achieve this by planning, planning by the few instead of by the many. The rulers make their five-year plans, but the attempt to anticipate what people will want and need is always inferior in practice to the activities of entrepreneurs and businesses as they attempt to profit by meeting future demand. The spontaneous market economy is far superior to the planned socialist one. The market economies grew wealthy; the socialist ones stayed poor.

Moreover socialism has in the past led to murder, sometimes of political dissidents, and sometimes mass murder on a horrendous scale. The consensus among analysts is that socialist regimes last century murdered 100 million of their own people. Obviously the Soviet Union, Communist China and Cambodia were among the leaders, but the other socialist countries contributed to the total.

Most of those who advocate socialism tell us that it has never been tried, and that the socialist countries never implemented 'true' socialism, which is a theoretical concept yet to be tried in practice. Yet the socialist countries called themselves socialist; they acted in the name of socialism; they thought they were practising socialism; and many modern socialists are apologists for what they did. If it's called a duck, looks like a duck, has feathers and webbed feet and a beak like a duck and it quacks like a duck, it's a duck.

If only The Observer would take The Observer's advice

Peter Preston has some useful advice for the economics editors of the nation:

And what are economics correspondents there for on the big budget outing? Not merely to take the latest Office of Budget Responsibility growth figures and turn them into a uniform tale of woe. As Alex Brummer of the Mail (and before that the Guardian) very reasonably pointed out, the OBR has “a flawed track record” on forecasting– and is glooming a damned sight harder than the Bank of England and IMF.

That may be right or it may be wrong. But the point of employing economics editors is to give the audience their own special take on Philip Hammond’s figuring, not to simply transfer pages of OBR (or indeed, extra-gloomy Institute of Fiscal Studies prognostication) into holy writ. Two questions matter most. Are we really in a hole this big? And even if we are, what can we do about it?

Quite so, at which point perhaps Preston would have a little word with Phillip Inman, the economics editor of his own newspaper:

Of course, this presumes that British businesses remain strong enough to benefit from their newfound freedom to trade with whoever they want.

If Fox had listened to the Bank of England’s chief economist Andy Haldane, he would know about the UK’s reliance on a small proportion of highly productive companies and the long tail of largely unproductive “zombie” ones that tick along without making much money or paying their workers much in salary, pension or other benefits.

All economies do that, it's only ever the top 10% most productive companies (or producers) which even try to export. Entirely understandable as mediocrity is generally available across geography. We also know what the solution is - lowering trade barriers. No, not to our exports, but lowering them to imports into the country. As the Treasury has explained:

In the long term, greater openness to trade and investment boosts the productive potential of the economy. Openness increases competition among firms, allows access to finance from abroad, improves the quality of production inputs, and creates incentives to innovate and adopt new technologies.

Indeed so, the cure for low British productivity is greater openness to trade, exactly what Liam Fox is suggesting. This is not a controversial point, this is simply the way that trade works. Might be useful for an economics editor, as Peter Preston suggests, to tell us all this, no? Mr. Inman?

A really interesting complaint about Universal Credit

There is much being said about the rights and wrongs of Universal Credit and we find this specific criticism to be particularly interesting: 

Thousands – perhaps even millions – of people could have trouble obtaining a mortgage because of problems with the way the government’s universal credit system and banks and building societies “talk” to each other.

A Guardian Money investigation into the difficulties experienced by a homebuyer living in one of the areas chosen to test the new benefit has revealed that some recipients could be at risk of being turned down for a mortgage. Some lenders are saying they will not accept universal credit at all when calculating how much they will lend, while others have apparently not amended their IT systems to deal with it – leading to problems and delays. On its published list of acceptable income types, Halifax’s website simply gives a blunt “no”.

The problem is not on the government side here, it's within the banks. They are not defining Universal Credit as viable income to count when determining the size of a mortgage that might be offered. Ho hum, well, lenders should be able to decide what they wish to consider - some will undoubtedly decide differently which is one of the joys of markets.

It is possible to dig a little deeper into this though. Even to start pondering the age old goose and gander point. For when we consider wealth and its distribution (say, the canonical Saez and Zucman paper) we are told that all of the things which government does to redistribute wealth don't count.

A life long under market rate rent is not a form of wealth (of course it is), the existences of free at the point of use education or health care are not wealth (of course they are), the various insurances provided by the welfare state are not wealth (Oh Yes they are!) and even the state old age pension, an index linked annuity, is not wealth in the way that a privately funded index linked annuity is wealth (it is).

The reason these are not to be counted is that government might change its mind. Therefore all of these sources of wealth are conditional upon politics and should not be counted.

The Universal Credit is clearly and obviously conditional upon future electoral politics for whatever amount might be paid so using our Goosey Gander test it seems fair enough that it shouldn't be counted as a reliable part of income.  

That is to assume that we're all playing fair in our determinations of inequality and redistribution which might, we agree, be something of a stretch.

It is however the underlying point which we find truly interesting. We all know that there is going to be a welfare state of some form - leaving aside the odd cultist it's entirely obvious that the modern polity is going to have some form of safety net. We can and do argue about how and how generous but the basic existence is simply a reality. Given that reality the provision is going to include a roof over the heads of those who otherwise, without redistribution, cannot afford one.

The underlying claim here is that those being redistributed to should be able to buy a house on what is forcibly taken from others through the tax system. Which we do think is an interesting claim. Is there actually any substantial, or even minimal, part of the Vox Populi which would agree with this assertion? 

That the children aren't sleeping on park benches is something that near all Britons will sign up to. That the system should enable those being housed at our expense to purchase does seem to be a significant extension there and not one we'd expect to be widely supported. Given that, where did this underlying assumption come from? 

Why should people on welfare be able to get a mortgage?