High time to legalise

If our politicians don’t act fast British businesses are going to be left behind in the race to commercialise cannabis across the world. By 2025 the global market for medicinal cannabis alone is due to be worth £40bn, and by 2021 the recreational market in the US alone is expected to be worth $24.5bn. The prohibition on research, development, innovation and sales of cannabis is holding British business back at a time when we need to be even more innovative and even more global in our trade ambitions.

In our 2016 report The Tide Effect report we estimated that the legal UK cannabis market could be worth £6.8bn annually, produce benefits to the government of between £750m and £1.05bn in tax revenues, and lower criminal justice costs. The numbers of offenders in prison for cannabis related offences in England and Wales would also be likely to drop from the current 1,363 inmates which currently costs the taxpayer around £50m a year.

Since we released The Tide Effect, more countries have moved towards legalisation and understanding the greater market potential the industry could bring. Last week California joined the ranks of American states to legalise recreational cannabis sales, which will drive billions of dollars of investment and create thousands of jobs, in a nascent industry. Canadian cannabis product manufacturer Aurora is expanding into Europe, sensing an opportunity to dominate a new market.

With more foreign direct investment flowing into the UK than any other country in Europe we would be well placed to get a new industry, with new export potential and a global reach, off the ground.

They’d have a pretty healthy market at home too of course. 6.5% of Britons have used cannabis in the past year. That’s 2.1 million people. But at the moment, they’re all criminals in the eyes of the law and forced to buy it from criminal gangs. Beyond the business case, that many people being criminalised by prohibition is making an ass of the law.

The image of stoners that campaigners against liberalisation use is outdated too. Nearly a million people use medical marijuana in the UK at the moment, so many in fact that the Council of the Royal College of General Practitioners (RCGP) has said it will issue guidelines for doctors on how to advise patients that are self-medicating currently.

But while we might be convinced of the benefits of being liberal we might have some work to do with the Conservative Party here in the UK. Their cousins in the Liberal–National Coalition in Australia have learned though and they’re making the case from a thoroughly Tory position. Australian health minister Greg Hunt last week announced that his party’s “goal is very clear: to give Australian farmers and manufacturers the best shot at being the world's number one exporter of medicinal cannabis.” Now, it would be great to see them embracing the choice of the consumer on recreational cannabis use too, but it’s a start.

We don’t need to be criminalising a whole section of society, we don’t need to be holding back British entrepreneurs, innovators and agriculture, and we don’t need to be driving consumers to the black market and potentially dangerous products. None of these things are conservative values and our Conservative Party should wake up to the dangers their stance on this issue is causing.

Enterprise, innovation, freedom of choice and personal responsibility are key to the debate on cannabis. Tories shouldn’t support marijuana legalisation despite being conservative. They should support legalisation because they are conservatives.

Opinions differ on Brexit - but could we at least agree on facts where facts exist?

We're well aware that opinions upon Brexit differ - at least one of us is willing to own up to unreasonable prejudice on the subject. However, we can't help but feel that where we do have actual facts at hand we should be able to base the debate upon such facts. This is not, to put it mildly, what is happening here:

More than 130,000 UK firms will be forced to pay VAT upfront for the first time on all goods imported from the European Union after Brexit, under controversial legislation to be considered by MPs on Monday.

The VAT changes spelled out in the taxation (cross-border trade) bill – one of a string of Brexit laws passing through parliament – are causing uproar among UK business groups, which say that they will create acute cashflow problems and huge additional bureaucracy.

Well, no. There will indeed be a change in how VAT is handled.  Imports from the EU will be treated just as imports from outside the EU currently are. Along with the deferral scheme available to all. There may be some cash flow effects but it simply is not true that all must pay the import VAT upfront. Importation creates a liability, not an actual payment that is.

You know, just not true? 

But much more than this:

Labour and Tory MPs and peers said that the only way to avoid the VAT Brexit penalty would be to stay in the customs union or negotiate to remain in the EU-VAT area.

That's simply argle bargle.

Without a VAT deal with Brussels, importers will have to pay the VAT upfront in cash and then recover the money later, creating a huge outflow of funds before they can be recouped.

As is that. 

Currently some 54% of UK imports come from the EU. The other 46% are subject to the same VAT laws that the 54% will become subject to. This doesn't seem to be a huge problem really, that 46% does keep on coming in, doesn't it? Also, as above, there is a deferral scheme.

But much more importantly, we do not need a deal with Brussels, nor must we stay in the Single Market, the Customs Union nor even the EU VAT area to deal with this, even if it is a larger problem.

Because, you know,  we're leaving. We thus get to decide how we're going to handle VAT on imports. This is rather the point, we're not subject to rules set elsewhere. We could, for example, extend the deferral scheme to 90 days, 180, if we wished. Why not, our country, our law?

Please do note that this isn't about whether Brexit itself is a good idea or not - we agree that opinions differ, even that at least one of us is deeply prejudiced upon the subject. But it is still true that facts are facts. We don't face some disastrous problem over import VAT upon exit, simply because exit means that we get to decide our own rules upon import VAT. Even if it is an actual problem rather than the non- one it appears.

Well, yes, what did anyone expect to happen?

Quite why anyone would expect something different to happen is unknown:

Coca-Cola is to use smaller bottles and sell at higher prices rather than alter its famous sugar-laden secret recipe, while Irn-Bru faces a growing consumer backlash over fears a new lower sugar version will ruin Scotland’s national soft drink.

The changes are part of the preparations underway in the fizzy drinks business for the sugar tax. The cost of some “price marked packs” of Coca-Cola sold in newsagents and convenience stores will increase by more than 10% in March, just before the new tax comes into effect the following month.

The plans will see a 1.75 litre bottle of Coke shrink to 1.5 litres and at the same time increase in price by 20p to £1.99. The price of a 500ml bottle is also increasing, from £1.09 to £1.25. The new price means the cost of a half-litre bottle will have soared 25% in a matter of months, as they were just £1 until last autumn.

We fully expect to hear some bleatings that it really should be Big Soda who pay this tax, not the consumers. But then why would anyone expect that to happen? Such taxes are going to be incident upon consumers.

In fact, that's rather the point of the original campaign. People should be (note, we don't think so, but this is the justification on offer) consuming less sugar, let us make it more expensive via a tax so that they do so. Smaller bottles which are more expensive - that's the job done.

But as we say, we do expect there to be bleatings about this. That in some manner it shouldn't be us who should be paying this tax imposed upon us.

It's quite wondrous how badly politics works as a solution to things

There is a political move to make us all £622 million poorer. 

This is not a good idea.

But then that's politics for you. The suggestion is:

A25p latte levy should be introduced on disposable coffee cups to cut waste, MPs have said. The plan is being considered by ministers amid calls for a complete ban on all disposable cups by 2023 unless manufacturers can make them recyclable.

It follows research which shows the UK throws away 2.5 billion paper cups every year, with many consumers believing they are being recycled when less than 1 per cent actually are.

The rest are incinerated or buried in landfill sites because they have an inner-lining made of plastic which paper mills struggle to remove.

The Environmental Audit Committee is calling on the Government to introduce a minimum 25p charge to cut waste in the same way the plastic bag levy has done in supermarkets.

That there's no component of a coffee cup which is in short supply nor likely to run out is one thing to say about this. However, as ever, it gets worse. Back in March 2017 we had a study of those very coffee cups and the effects of a deposit upon them, something one of us explained here.

Idiocy may not be a word contained within the report, but the research found that a charge of 25p per cup only gets a few per cent of people to take a reusable one. The vast majority of people shrug and take the standard ones which, after that 20 minutes of use, pile up in a landfill site. 

The charge doesn't change behaviour. So, that's one justification of such a Pigou Tax out the window. The other possible justification is that the revenues raised should be spent upon dealing with the problem. Yet we can also calculate what is the cost of the problem. That's some £3 million a year. For that is what the cost, as measured by the Landfill Tax, is to stick the nation's discarded coffee cup[s into holes in the ground.

A decent enough stab at the revenue raised from this tax is some £625 million (2.5 billion cups, 25 pence per cup). That is, there would be a charge of £625 million to solve a £3 million problem. This makes us poorer.

This is not a good idea.  

But then this is how modern politics works apparently. Nine months on from the scientific proof that this is a damn bad idea it's an actual policy proposal. 

Who cares about Adult Social Care?

Obviously all those wonderful people who provide it, and their clients, care but as one moves up the management hierarchy, the question becomes more difficult. For a start, no one in Whitehall has much responsibility for Adult Social Care. According to the King’s Fund “Spending on adult social care services by [English] local authorities fell from £18.4 billion in 2009/10 to just under £17 billion in 2015/16, a real-terms cut of 8 per cent” although that is being topped up with some funding from the NHS. The NHS overlaps with Adult Social Care notably for the elderly and those with mental health problems, the two fastest growing problems of our time. Better management of this overlap would make the NHS more cost effective and better focused. Yet Cabinet Ministers rarely discuss Adult Social Care. The Chancellor, in his hour-long autumn 2017 budget statement, made no mention of it.

Local authorities carry the can but they are handicapped by knowing neither what funding will be available from year to year nor the value for money they are providing. The Care Quality Commission (CQC), remarkably, evaluates individual homes but not the service provided by any local authority as a whole. A local authority cannot improve its offering if it does not know its position in the league table nor what it is doing wrong nor how other authorities are doing things better. Still less can they see the total national picture.

If we could agree the outcomes expected from each LAASC (Local Authority Adult Social Care department), and measure and publish that performance from year to year, the less successful could learn from those getting better results and/or better value for money. School league tables may be controversial but at least they identify where best practice may be found. Dividing outcomes by the annual costs of each LAASC as a whole and per client would give indications of productivity. Such measures inevitably will be crude but even so the apparently most productive should provide insights for those with less attractive indications.

iMPOWER, a consultancy working exclusively within the public sector, has taken some bold steps in this direction. For 150 LAASCs they measured costs and performance in three “domains”: older people’s services, all age disability and health and social care interface. The second domain’s metrics are muddied by children’s social care and the third by some NHS costs but they have had to make the best of the metrics available. If this broad approach was adopted nationally then more precise outcomes and measures of those outcomes could be agreed and synchronised, replacing the current data reporting so that no net additional bureaucracy should be needed.

For each domain, iMPOWER selected six to ten outcome measures, from the Adult Social Care Outcomes Framework, and then set those against published expenditure to calculate productivity scores (the most current nationally available data on which was from 2016/17 budgets and outcomes). This provided an LAASC productivity ranking for each domain. Each overall LAASC rank was the mean average of its three domain rank positions.

Clearly there is plenty of room for debating the outcomes, their measurement and the methodology for integrating them into useful performance and productivity indices. iMPOWER should be congratulated on getting the show on the road and encouraging LAASCs to improve what they have done. Motivation is key and therefore iMPOWER have elected only to publish the names of the ten most highly ranked LAASCs. Every LAASC will be told, if it asks, what its ranking was and how that was calculated but not how the other 139 fared.

To be effective, this approach will have to be totally transparent. Every LAASC should want to know how comparable LAASCs scored but the experience of introduced school league tables shows that such systems need to be introduced slowly and gently.

Reducing outcomes to single productivity indices is likely to be an over-simplification too far. An LAASC may be great for elderlies but hopeless for mental health. Therein lies much of the benefit from this type of analysis: highlighting the particular areas for improvement. The usual convention is to have a “dashboard” of the key indicators. These are used by children’s services departments and an agreed national standard set for LAASCs, monitored by the CQC, would serve this sector far better, and at much less cost, than a management hierarchy such as that in the NHS and the Department of Health.

As we know it's possible to make Scottish wine

It's not just that we can make Scottish wine, we do, as the existence of Buckfast tells us. Although we've a certain suspicion that it's not actually the wine that comes from Scotland. But as Adam Smith did say:

By means of glasses, hotbeds, and hotwalls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expense for which at least equally good can be brought from foreign countries.

Given the journalistic tastes of some of us around here we can't quite agree that wine 30 times the price is a good idea. In fact, as with the original injunction, why not do something else and buy 30 times the wine from Bourdeaux. Perhaps, say, grow that barley Scotland does so well and make whisky? Some of which we could trade for wine? 

Which brings us to this insistence: 

With English fizz more of an emerging category than its entrenched cousin across the channel, the co-founders had to secure the best of the best of British grapes.

Clough had enough vineyards from which to source; in England, he explains, there are about 500, producing enough fruit for, on average, 5m bottles a year, two-thirds of which is sparkling wine.

"One million new vines went into the ground last year, which should result in another 1m bottles within the next seven to 10 years," says Clough.

"The [fermentation process] means that it's a long game, but contrary to what some people think, Britain can produce a premier sparkling wine."

We've no doubt this is possible, our question is why would we bother? Entirely true that what people do with their own resources, their ships they float upon the sea of commerce, are entirely up to them. As long as they are indeed using their own resources, not our.

But still, expensive wine just doesn't seem to be the way to go, even with so many opting for a dry January.

Fat Cat Thursday

Today is Fat Cat Thursday. It marks the fact that in just three working days Britain’s top bosses will have earned more the average full-time employee will over the whole year. The High Pay Centre (who publish this stat) argue that this is evidence that CEO pay is too damn high. The Times believe that executive pay is damaging the reputation of free markets. And the Prime Minister agrees, she thinks that firms that offer CEOs massive pay packets are ‘the unacceptable face of capitalism’.

Hogwash! CEOs are paid handsomely because the decisions they make are so important. When Microsoft’s CEO Steve Ballmer waited too long to invest big in smartphones, he destroyed share value magnitudes higher than his pay. The right CEO can take a firm to the next level (e.g. Steve Jobs at Apple) and the wrong CEO can bankrupt a firm. Is it any wonder that firms are willing pay millions to get the right one?

Some argue that while CEOs are important, today’s CEOs are no more talented than CEOs ten-twenty years ago. They bring up the fact that over the last ten years executive pay has risen by 80% while returns to shareholders have only increased by 1%. But, as Sam Bowman points out that comparison is misleading. CEO pay (£525m) is just a small fraction of returns to shareholders (£75bn in Dividends). 1% of a very big number (1% of £75bn is £750m) can be worth more than 80% of a much smaller number (80% of £525m is £420m).

It is the equivalent of arguing that spending on cybersecurity has quadrupled but profits are flat. That may be the case, but it doesn’t imply spending on cybersecurity is a bad idea. As Intel found out today.

When I debated the High Pay Centre’s Stefan Stern on LBCthis afternoon he argued that, paraphrasing, today’s CEOs are no more talented than CEOs in the past, and so questioned why they should be paid more. They should be paid more for the same reason Harry Kane is paid more than Alan Shearer. CEOs, like Premier League footballers, have become relatively more valuable. Just as Premier League matches are now screened across the world. This is backed up by research from Quigley, Crossland and Campbell. They looked at unexpected CEO deaths and their impacts on share prices. This allows them to control for the fact that when CEOs are fired, even more bad news is often revealed at the same time. They found that since the 50s while good CEOs cancelled out the impact of bad CEOs, share price changes in either direction were much higher.

Why’s this the case? I can think of two big reasons.

1. Globalisation

Globalisation has increased the risks associated with bad decisions but also increased the reward associated with good decisions. If a CEO makes the wrong investment, it could lead to an international competitor snatching market share. On the flipside, the potential upside of being a market leader not just in the UK but also the US, China and Japan means that good CEOs are more valuable.

2. Intangible Capital

As Stian Westlake and Jonathan Haskel argue persuasively in their book Capitalism without Capital, business today is as much about tangible machinery as about branding. In the past, if General Electric’s CEO overinvested in microwaves and under-invested in cars, they could at least sell those machines on to other firms. Perhaps not for as much as they paid, but not for nothing either. That’s not the case with branding. Take Burberry, before Angela Ahrendts became Apple’s top paid executive, she was in charge of turning the Burberry brand around. When she joined, it was a downmarket brand tainted by its association with ‘chavs’. She made the call to close factories to reduce counterfeits and cut out cheaper products. As a result, Burberry once again became a luxury brand and the fashion house’s share price more than doubled. If Burberry hired a different CEO, the brand might have been permanently associated with bad taste. You may be able to sell off a sewing machine, it’s much harder to sell off a tainted brand.

If CEOs are as valuable as stock markets think (and remember if they are wrong there is big money to be made) then crackdowns that scare off top talent could be a disaster for British businesses.

If we're to speak of land wealth then we must get it right

Is a significant portion of the national wealth in land and or housing? Yes, it most certainly is. What's not quite true as this following claim though:

But ignoring land is a mistake. Despite the explosive growth of corporations since the Industrial Revolution, land still represents a huge percent of all the wealth in the economy. What’s more, focusing only on capital gains neglects the extremely important fact that land earns income from rent. If you live in your own house, this income is implicit -- living in your own home means you don’t have to pay rent to someone else. But if you’re a landlord, you get checks every month, just like stockholders receive quarterly dividends. And in the same way that a stockholder can use dividends to buy more shares, a landlord can use rental income to buy more property -- thus, rent needs to be counted in the return to housing.

And that total return is higher than people realize. According to new research, the return on residential real estate has been as high as or higher than the return on equity. As modern economies have grown and developed, owners of the ground on which we live have been steadily enriched.

This simply isn't correct. Land as a portion of national wealth has declined enormously over the past century and a half of capitalism. Quite the most remarkable change in fact has been the destruction of farmland - those grand aristocratic estates - as a factor in the calculation of that national wealth.

For people are getting confused here, It isn't the land upon which our houses stand which is valuable. It is the permission to put a house upon that land which is. This goes back to that point we so often make, agricultural land is perhaps £10,000 a hectare in the SE, land with planning permissions some 100 times that. The same is true of the land which sits under the houses already built.

That is, the rise in "land" as a portion of wealth entirely disguises the reality, that it's gone from being some small number of great estates to being the land under owner occupied housing making up that wealth.

We could also change this quite a lot by having a sensible planning regime of course. But it's still important to understand that it's not some class of landlords, rentiers, controlling that wealth being talked about. It's us. Which does rather change what we do about it, no?

Give Lord Price a megaphone

Lord Price, previously CEO of Waitrose, was appointed Trade Minister at UKTI, now the Department for Trade and Investment, in April 2016. Finally the government had appointed someone to lead our exports who really knew something about business. For the preceding 20 years, UKTI had seen a near-annual churn of ministers and ill-judged policies. The churn was stirred essentially by mandarins who thought they knew more about exporting than exporters did. Yet just eighteen months later Lord Price was gone too.

This week he gave an interview to the Daily Telegraph calling for government to hand export promotion to "a German-style network of chambers of commerce". He is right because exporting successfully as a start-up is not a matter of mathematics, digital analysis or micro-economics but of personal human contact. Exporters and importers need to meet and know each other. The best people to show the way are those who have already 'been there and done that' - not civil servants in Whitehall and embassies.

The idea is not new: the British Chambers of Commerce (BCC) have been pushing it for some time. In 1991, Michael Heseltine, then President of the Board of Trade, proposed something similar also based on the German network of chambers of commerce. It was called “Business Link”.  BCC not only failed to grasp the opportunity but opposed the whole idea. 

Reviewing the matter 20 years later, Heseltine stated that the BCC: “should have gone to Government and said, look you've got all these services, work with us and create the one stop shop. That's what they should have done. We did it for them. I think they regarded Business Link as an intrusion into their fiefdom. But the reason we created Business Link was because the Chambers weren't doing a good enough job."* In the event, Whitehall mandarins appointed themselves to the key Business Link positions so that was a disaster too.

Lord Price’s argument is cogent and no-one is better placed to outline the way forward. Remarkably, instead of welcoming what could be regarded as their own proposal, the BCC's response was to grumble about who should pay for it. Lord Price suggested businesses pay “a small levy – say £100 to £1,000”. Adam Marshall, the Director General responded that such a levy would be seen ‘as a “tax on business” and turn the chambers into quasi-governmental organizations that would be less free to argue fearlessly for business interests.’** Even by BCC standards, this is a miracle of contrariness: he is claiming that members paying dues to a private club, or trade union, for representation, and the provision of services, would thereby inhibit that club from so doing.  

It is unfortunate that funding is muddying the water at this stage. The government export department costs around £400 million p.a. but there is little reason why it shouldn't focus solely on things only government can do (treaties and such like) with a majority of that £400 million, i.e. £1,600 or so per exporter, released to fund BCC’s export services and those of its overseas partners. No new levies or taxes would be needed. 

While Heseltine’s issue that chambers aren’t yet doing a good enough job, we could always suggest the possibility that government should pay chambers by results. A scorecard would need to be agreed and a scorekeeper (perhaps a business school with strong international marketing expertise, to collect and publish the scorecard) but this is not an insurmountable obstacle. Some chambers are excellent and are already helping the members to export in significant ways. Inevitably some chambers are better than others and, overall, they are not up to the standards strongly exporting countries like Germany. It is no criticism to say that they could do better: every organisation in the country could do better. Suggesting complacency, or that helpful opportunities are being opposed, is not a criticism I would make. 

We can be sure that the mandarins will oppose Lord Price’s suggestion and ministers will claim to be pre-occupied by Brexit, forgetting that a key rationale for Brexit is the very freedom to export to which Lord Price is opening the door.  We know this because Lord Price must have outlined his thinking before leaving office after a mere eighteen months.

To take his proposals forward he needs to set up his own working party with the BCC, other business groups, experienced exporters and academics. The House of Commons International Trade Committee should discuss the proposal. It needs to be refined until business speaks on it with one voice. Then give Lord Price a megaphone and government will have to listen.

* Forte, Elliot (2011). Intervention: The Battle for Better Business. Lulul. pp. 252–264. ISBN 978-1447863236.

** Daily Telegraph, ibid.

Open access on HS2?

As the cost of HS2 continues to rise at an alarming rate there needs to be far more detailed analysis over its benefits. With wider time savings negligible, the project’s only real raison d'être is a much needed boost in capacity. The existing ‘West Coast Mainline’ which connects Scotland, NW England and the West Midlands to London is currently running close to capacity threatening future growth without new lines.

The current tender for the new West Coast franchise incorporates both existing and new HS2 services into one single operation giving an even bigger monopoly than is currently the case. Given the eye watering cost of constructing HS2 the government is keen to claw back as much fare box revenue as possible from the winner of the incorporated franchise bid through hefty premium payments totally undermining potential for competition. Given HS2’s limited time saving - owing to the relatively short distance – maintaining the status quo let alone improving services on the existing line could prove financially disastrous to the government’s proposed franchise model. 

When trains from East Kent to London transferred to HS1 in 2009 fast services on the existing route were axed. Passengers from Ashford to London had the choice of either accepting an increase in journey time of 44% or paying a 24% premium to travel on HS1.
 
If this framework was adopted on HS2 - and I strongly suspect it will – there is a real risk that competition will be further undermined. Whole swathes of the NW of England and Scotland will be left paying significantly more than Virgin’s already grossly inflated ‘walk on’ fares. Manchester to London currently costs £338 for a standard class peak return; add 24% and this becomes and eye watering £419 standard or £600 first class. 

If the classic route becomes 44% slower - roughly 3hr from Manchester to London vs the current 2hr - we will have the worst of both worlds. Many other locations along the existing route such as Warrington, Stoke on Trent and Coventry risk coming off even worse with the loss of fast direct services to London without an HS2 replacement. In Lancashire and Cumbria there is talk of no direct trains at all. With the 2nd phase of HS2 only being constructed as far north as Wigan, trains will then have to transfer to the classic route onward to Scotland. To compensate for the slower line speed the current plan is to largely omit intermediate stops.

To enhance HS2 new operators need to be granted access to the existing 125mph line through ‘Open Access’ agreements. On the East Coast route this model currently works well even though it’s limited to only a few stations. Where head to head competition exists fares have fallen and passenger satisfaction has risen. HS2 provides a golden opportunity to scrap the unpopular franchise system on the West Coast route and replace it with a system that delivers real choice for passengers.