The European Union has just invented the perfect tax for us here in Britain

Glory Be, the European Commission is mulling over the imposition of a policy which creates the perfect form of taxation for us here in Britain.

You see, the problem with tax - any tax - is that it's a cost. Sure, we can buy such lovely things with the money raised but we also lose those things we would have had if the cash hadn't gone off to the Revenue. The answer to this is, of course, that them over there pay the tax while we get the spending. As Monty Python put it: 

Politician: Bravo, Madge. Well done. Taxation is indeed the very nub of my gist. Gentlemen, we have to find something new to tax.

...

Man In Bowler Hat (Terry Jones): To boost the British economy I'd tax all foreigners living abroad.

Well, yes, why not, and that's just what is being proposed:

Brussels could seek the moral high ground by covering the application costs of EU nationals who want to stay in the UK after Brexit, under proposals being discussed at the highest levels of the European commission.

The UK Home Office has threatened to charge a £72 fee for applicants seeking so-called “settled status” in the UK, which grants them indefinite leave to remain. Applicants will have to demonstrate five years’ continuous residence and pass a criminal record test.

It has emerged that the European commission president, Jean-Claude Juncker, has expressed sympathy with a suggestion that Brussels could cover the fees if the UK does not make a more generous offer during further negotiations this year.

According to EU sources, Juncker agreed in a meeting with the European parliament’s Brexit steering group to personally take up the issue of the charges with Theresa May. However, he is said to have recognised that Brussels may need to look at funding the costs through the EU budget.

If that fee were being paid by those Europeans who wish to stay in the UK post-Brexit then we'd want to make sure that it is such a modest sum just to cover the cost of the paperwork. However, look what happens when it is the EU budget which covers it.

We here in Britain won't be contributing to EU coffers post-Brexit (well, not if anyone's got any sense we won't). If that budget is picking up the cost then the applicants won't be paying it either. So none of those will be discouraged by whatever the rate is. But the sums raised will be contributions to the UK budget, those contributions being paid by those who are still taxpayers chipping into the EU budget.

That is, the money will be spent upon us and it will be, by definition, foreigners living abroad who are paying the tax. It's the perfect form of taxation therefore.

At which point, why be pikers about this? £72 a head? Why not £720,000 a head? 

Yes, sadly, it's not going to happen. But we can dream, can't we? 

Living the high (street) life

All that is gold does not glitter. Sometimes even the dullest sounded policy names actually contain exciting possibilities. So it is with a little-known planning permission policy called ‘Permitted Development Rights’ that allowed a change of use from office space to residential. PDRs come from rights not given by local authorities but from parliament. 

The allowance of change of use began as a temporary order, under the Coalition government but, after the period showed a rise in the numbers of homes being created at a time for decreased demand for office space, the Conservative government in 2016 decided to make it permanent. It was a small change but it has been instrumental in helping the government meet its 200,000 new homes per year target. It is also a change that is helping towns and cities provide young people with new and affordable homes. 

But there are a couple of issues with it. Firstly, commercial areas are still exempt and will be until 30 May 2019. This means places like the City of London, Westminster and other inner London Boroughs have time to apply for what is known in the jargon as an Article 4 Directions to remove the Right in their area (what everyone else would call a special exemption and protectionism). 

Secondly, it doesn’t go far enough. Permitted Development Rights are aimed at redundant office space, allowing quick and efficient transfer between use of a building. But it leaves A1 and A2 (in human speak this is what we call shops) requiring change of use to receive prior approval from (and subject to objection) local authorities. There is also still a space limitation of just 150sqm on the transfer from shop to residential. Yet reported vacancy rates on our high streets stand at 11.1% in England, 11.9% in Scotland and 14.5% in Wales and the Federation of Master Builders estimated that we could build nearly 400,000 homes if we converted these empty shops. We have the untenable situation where shops on high streets are boarded up and left to rot while people are clamouring for somewhere good, convenient and affordable to live.

And when people have moved in, guess what they will need? Places to eat, drink, socialise, buy their groceries, their DIY supplies. And they’ll want to work near to where they live and have community spaces that draw people in. Getting people back living in the centre of town will be a boost for businesses of all forms there. 

We should all welcome the return of people living in our cities. Cities filled with young, educated, and skilled workers are more productive. Creating more choice for workers that don’t fancy a long commute but do fancy living where they socialise. Not to mention that creating more opportunities for innovation and entrepreneurship could help Britain’s cities boost the country back up the productivity league. 

We can breathe life back into the high street, provide affordable homes, boost Britain’s productivity and do it simply. Let’s extend Permitted Development Rights to allow empty shops to become houses and get back to those streets paved with gold. 
 

The effect of the Trump tariffs

Although designed to protect American jobs, the new Trump tariffs will have
consequences wider than those intended. The tariff on imported large
residential washing machines is to be 20% on the first 1.2m machines imported,
and then 50% on those above that number. These tariffs will decline to 15%
and 40% respectively in the 4th year. This is designed to protect US companies
such as Whirlpool, but it means that domestic US consumers will have to pay
more for their washing machines because rival products made by Samsung
Electronics and LG electronics will rise in price. It could also hit sales at Sears,
which outsources its Kenmore brand to LG factories.

The tariff on solar panels is to be 30% in the first year, declining to 15% by the
4th year. This will undoubtedly hit America’s booming solar energy industry by
raising its costs. It could add $750 to the cost of fitting out a house, and the
Solar Energy Industries Association estimates it could cost 23,000 US jobs.
Crucially, it will also slow down America’s switch from coal and oil to alternative
and cleaner energy sources. The rapid decline in solar energy costs has been
one of the factors in driving the US to rely more and more on less-polluting
energy generation, and the solar panel tariff will set that back.

In the affected countries, China and South Korea, there will be job losses as an
important export market raises barriers against their goods.

The higher costs to hard-hit American households and the threatened job
losses there are not what the tariffs were intended to achieve. On a wider level,
they raise the prospect of retaliation and a trade war that will cut trade and
economic growth worldwide. The tariffs are not good news.

Baby steps, baby steps - Guardian correctly divines the cause of high housing costs

But, sadly, doesn't manage to come up with the right solution to this problem. Still, baby steps, the correct diagnosis is a step toward crafting a solution:

The rooms in their houses are likely to be cramped: Britain is reckoned to have the smallest new-build homes in Europe, partly because there are no mandatory national space standards. And too many of these places lack the shared spaces and amenities that might give them some small sense of community: meeting halls, sizeable play areas, any space for businesses beyond a single small supermarket.

What is going on here? Since 1995, the total value of UK land has increased more than fivefold. According to the Valuation Office, whereas the average price of agricultural land in England is £21,000 per hectare, the equivalent with planning permission for housing now comes in at a cool £6m. Impossible land prices cut out developers beyond the tiny handful of giants who dominate the market. The sums they have paid for their plots have consequences not just for house prices, but basic standards: developers too often try to make their profits by building houses as cheaply as possible, and squeezing the share given over to “affordable” homes.

As we have been saying, ad nauseam, there is no shortage of land in Britain upon which houses could usefully be built. There is a shortage of land upon which housing may be built which is why that gross price difference between land where the permission exists and where it does not. 

There is a simple answer to this, grant more permissions and the cost of them will decline.

There is another problem which you readers here have pointed out to us. Which is that affordable housing requirement. This is a tax upon the building of new housing. If you build some number of units then you must also build some other number of units which cannot be sold at their cost of building. Yes, this acts as a tax - we get less of the things that we tax thus we're getting less new housing as a result of the affordable requirements. Thus we should abolish said requirements as well.

Fortunately, if we solve the price of building land problem by just issuing more permits then we don't need the special allocation of affordable housing simply because we'll have made all housing more affordable by the building of new houses. Further, of course, cheaper building land will lead to less squeezing of units onto a no longer extremely limited supply, neatly solving the size issue as well.

The Guardian's proposed solution involves more tax and more regulation. That government should do more. And we do agree that government should do more here. You know, issue more permits. Or, even, do less by deconstructing the system which requires such permits.

As we say, the analysis of the problem is pretty good. Britain's housing prices are caused, at least in large part, by the cost of land with permission to build. So, increase that supply and prices will decline. What's difficult about this?

Oxfam don't have the monopoly on truth

Oxfam’s annual wealth inequality press release features a startling statistic. And no, it isn’t that the 85 richest people in the world could fit on a single double-decker bus. They claim that 2/3 of the world’s 2,043 billionaires got their wealth through cronyism, inheritance, and monopoly.
 
I won’t dispute the numbers for cronyism and inheritance. But, I was curious to see what they define as monopoly. After rummaging through their briefing paper I found a citation to a report called ‘Extreme Wealth is Not Merited’.
 
In the paper, they try to identify whether wealth is the result of inheritance, cronyism, technology, globalisation, or monopoly. They reckon that nearly 20% of billionaires owe their fortunes to monopoly. That seems high. Let’s see how they worked that out.
 
They make some bold claims. First, as part of their measurement they identify any IT firm benefitting from substantial network effects as monopolistic. As I argued before, this naïve ‘winner take all’ theory of network effects doesn’t fit the data. They assume that there is intense competition at first, but as soon as one major players emerges network effects create massive barriers to entry. The author argues that even if the initial phase of competition was furious, the rewards to the winner are unfair. Strangely, the author doesn’t even argue that this process is inefficient or harms consumers. Rather, they argue that the network externality benefits would exist even if another firm won out.
 
It’s a rather strange argument. And it should be seen in full:
 

“However, the externality exists independently. It is not a product of the business strategy, but is inherent to the nature of the product. Information technology billionaires thus capture and benefit from network externalities, but they do not create them. So the source of the extreme wealth, the externality, is not something that the billionaire contributes to society. Talent, effort, and risk-taking are certainly necessary to capture and benefit from the externality. But the wealth concentration that the externality creates is not proportional to, and indeed is largely independent from, that effort, talent, and risk-taking. It is the externality (e.g., the fact that everyone wants to use the same social networking website, whichever it is) that creates the extreme wealth, while the business strategy merely determines who gets it (e.g., a better-quality site is more likely to capture the externality, everything else equal). Network externalities create winner-takes-all markets where, by necessity of the nature of the product, one individual can become extremely rich while others, perhaps slightly less talented or simply less lucky, get nothing. Thanks in large part to network externalities, the founders of some leading information technology companies have accumulated wealth thousand or ten thousand times as high as that of their unsuccessful yet equally talented—or only marginally less talented—competitors (i.e., billions or tens of billions of dollars compared with millions, which is what most talented computer programmers can expect to earn in their lifetime)."

They also worry about vendor lock-in (bundling). Where firms with monopoly extend their dominant position in one market into another by bundling goods together. This would be illegal under competition law in the UK and US. Oxfam’s assumption is that antitrust enforcement is too weak. Perhaps, it is but extraordinary claims require extraordinary evidence.
 
However, the next step is crazy. Even if you suspect that there might be some monopoly power in IT (Facebook, Google, Microsoft), it’s a bold claim that all wealth generated in IT is the result of monopoly yet that’s exactly what they do.
 
To quote their report. Any billionaire whose “wealth [was] mainly acquired in the information technology industry (presumption of network externality, vendor lock-in, and public good market failures)” is classified as owing their wealth to monopoly.
 
They also classify billionaires whose “wealth [was] mainly acquired in the finance, health care, and legal industries or as CEO of a company that one has neither founded nor inherited (high presumption of the asymmetries of information market failure)” as owing their wealth to monopoly.
 
I’ll leave the reader to decide whether Oxfam’s 2/3 claim is fair.

 

Funding Health and Social Care

Responsibility for both defence policy and defence expenditure is evidently expecting too much of the MoD.  If that's true it might be better to transfer the purse strings to the Foreign and Commonwealth Office who know best where our forces are needed.  The government has already applied this thinking to adult social care. The Department of Health has been responsible for adult care policy these past seven years, and that role has been emphasised by adding it to the departmental title. Yet expenditure mainly comes from the Ministry of Housing, Communities and Local Government. As a result, almost all the government’s social care money gets to the front line. 

By contrast, only 71% (£99bn.) of the Department of Health budget is used to treat patients, together with £670M (0.5%) topping up local social care budgets to facilitate bed unblocking. The comparison with the MoD is uncanny: both would have plenty of money if they focussed it on the front line.

Primary and secondary care are funded by Clinical Commissioning Groups (CCGs) which were created by the 2012 Health and Social Care Act with the praiseworthy aim of reducing tiers of NHS management. They replaced Primary Care Trusts and Strategic Health Authorities.  The idea was to put GP practices in charge and to use market competition to reduce costs.  In the event, market forces have no impact on NHS hospitals: these juggernauts roll on as they, or their consultants, will.  And the 211 CCGs created mini-bureaucracies distracting GPs from their patients.  Nobody outside the system now likes CCGs but a credible alternative has yet to emerge.

The “key messages” of National Health Service Clinical Commissioners' (“the independent voice of clinical commissioning groups”) most recent self-justification was a set of semantic moves. From “In the future, there is unlikely to be a single model of clinical commissioning but all models should be locally driven and defined” through “Strategic commissioning provides an opportunity for CCGs to increasingly work together” to “Where a model of strategic commissioning develops, we expect national bodies to support this as a valuable part of the health system.” In other words, NHSE HQ is not going to change anything, just standardise everything. No specific improvements are proposed and the bottom-up, patient centred claims are abandoned. The patient loses but bureaucracy wins.

The system fails to recognise the root funding problem: treatment needs are not predictable. No hospital can know ahead of time what CCGs will commission nor can CCGs perfectly predict what will walk through their doors. CCGs are supposed to budget for a small surplus, which, if they make it, ultimately returns to NHSE. A commercial organisation, or even the BBC, has the flexibility to make savings, even late in the year, to offset over-runs elsewhere. But healthcare provision cannot be switched on and off like electricity.

The West Norfolk CCG has just provided a case study. Due to poor accounting, a £7.8M commitment was overlooked in 2016/7 and became a loss. The budgeting process for the following year, being unaware of the hole, made the same error so by January 2018 it appeared that they would be overspent by £10M for the current year.

The Chairman told his members they had to “face a star chamber of NHS executives. The Regional Director, Dr Paul Watson, was the lead inquisitor alongside three other NHSE big wigs. At the end of the meeting we were left in no doubt that unless we immediately start reducing expenditure then NHSE would not hesitate to disempower the Governing Body and current executives and send in managers under legal directions to turn things around. They would have little regard for the long term consequences of their actions, their prime imperative would be to simply save money.”

The main problem concerned commissioning primary care practices to provide “Local Enhanced Services” (LES), such as phlebotomy, electrocardiograms and minor surgery that would otherwise have to be provided (more expensively) by hospitals. This is part of the sensible strategy to push work back from secondary to primary care and thereby save taxpayers a great deal of money. Unfortunately the West Norfolk CCG (now departed) Finance Director had not budgeted for the work the surgeries were now contracted to do. The master plan of the NHSE executives, it turned out, was to save the money by simply not paying surgeries for the LES work they had done.

As the Eastern Daily Press and British Medical Journal reported, this caused uproar in West Norfolk. The Norfolk and Waveney Local Medical Committee and the Primary Care Contracting Committee (yes – how do GPs find the time to treat any patients when there are so many committees to attend?) were up in arms. Questions included whether NHSE had the authority to take over, still less unilaterally break contracts. If the NHSE executives suspended, as threatened, LES expenditure, the taxpayer would ultimately have to meet the higher patient costs elsewhere. 

Overall, CCGs are coping well but the West Norfolk CCG is far from alone. The National Audit Office found “an improved underspend of £154 million across clinical commissioning groups, yet 62 groups reported a cumulative deficit in 2016-17, up from 32 in 2015-16.” Of course CCGs and hospitals should not overspend their budgets but these accidents will happen from time to time and the system should allow for that. The simple solution would be to abolish CCGs, and the concept of “commissioning”, and fund hospitals and primary care practices directly, as is increasingly the case for schools with limited funds held back centrally by NHSE. Bearing in mind that most practicing GPs are independent and Foundation Trust hospitals are answerable to parliament, NHSE executives should see themselves as counsellors and promoters of best practice, rather than as line management.  

Legalise drugs, don't decriminalise them

Last week, I wrote for The Guardian on why advocates of drug law reform should opt for legalisation over decriminalisation. The article generated a great deal of debate and made a big splash on social media. You can read the full piece here. Here’s an extract:

Unlike decriminalisation, a legalised, regulated market would drive many street dealers out of existence. This is especially important for underage drug users because, unlike regulated shops and pharmacies, street dealers don’t ask for ID. They also tend to be unreliable sources of information on recommended dosage, and black market drugs are rarely pure. When I go to the pub, I know whether I’m getting beer or vodka; drug buyers on the street can only hope they’re getting what they’re paying for. The UK-based drug testing organisation The Loop has reported finding drugs laced with everything from concrete to crushed-up malaria tablets at music festivals.

The Adam Smith Institute has been advocating drug legalisation for years. Our most recent research paper on the subject, The Tide Effect, explores the case for cannabis legalisation. If you’re interested in learning more about debate between decriminalisation and legalisation, our former Executive Director Sam Bowman wrote this interesting piece evaluating these two approaches.

It’s also worth noting that there’s more to the drug policy debate than the question of prohibition, decriminalisation, or legalisation. On a local level, festival drug testing services like The Loop should be supported as part of an immediate harm reduction strategy. Our approach to regulating so-called ‘legal highs’ (or New Psychoactive Substances) is a failure. And it’s important to focus on the specifics of any legalisation proposal, right down to the optimal system of taxation and regulation for legal cannabis. In every area of the drug policy debate, we’ll continue to make the case for harm reduction and liberalism.

Should Carillion have paid more dividends or continued to build the conglomerate?

We have one of those lovely times when the received wisdom is doing a screaming u-turn:

Lifting the lid on Carillion’s strategic plans, it is clear that the company’s board mistook tactical nous for strategy. Not that there was much common sense in taking a building company and morphing it into a conglomerate that tries to meld together the management of prisons, hospitals and schools as if they were all the same.

We can - approximately and roughly speaking you understand - have two models of company finance. One is where a successful business, doing whatever, uses the profits being made to finance expansion into some unrelated area. Become a conglomerate in the jargon. We can also have a system whereby a stream of profits is returned to shareholders and they then invest in other companies, other management teams, which attempt at least to specialise in those other tasks.

The 1950s to 70s - roughly speaking again - were dominated by the conglomerate idea, subsequent decades by the sticking to the knitting and allowing the shareholders to allocate capital. One of the reasons for the change being that capital markets became much deeper and more liquid, meaning that shareholder allocation dropped in price in comparison to management allocation.

Oh well, shrug, horses for courses and all that. We'll find out which works best in time as those better attuned to current conditions outperform those who aren't. This is, after all, the point of having a market in such forms of organisation in the first place. We don't know which is better until we try it out.

But do note this screaming u-turn going on. We've got here the criticism of the conglomerate route. That critique coming from the very same source as the critique of the dividend paying method. How dare companies return profits to shareholders to allocate instead of management "investing," but also how dare management build a conglomerate? 

We have a preference for the pay it out and let the owners of the money, the shareholders, make the decisions. We do think capital markets are liquid enough for that to work. We're happy enough to argue the toss with those who prefer the conglomerate version. But we do still insist that cake cannot be had and eaten. Shouting that Carillion both paid too much in dividends and also used capital to expand into unrelated businesses to ill effect is really to gorge on that gateaux while still admiring it on the plate.

As we've been saying, migration explains the life expectancy puzzle

For a number of years now we've been trying to beat into the general consciousness something very important about life expectancy figures. No one, ever, measures the age at which people born in a particular place die. What is measured is the age at which people living in a place at the time of their death die. This is an important distinction.

Retirement towns (say, Bournemouth, just to use a cliche) have people who have survived to 65 to retire moving to them. This then raises the average age of death there by the leaving out of the figures of those who die before 65. Actual retirement communities - such as exist in parts of Florida say - will have vastly higher average ages at death than intensive care units for premature babies. Put that way it just seems obvious yet all too few manage to grasp the implication.

That implication being that migration matters and matters hugely. Anne Case and Angus Deaton famously found that Appalachian life expectancies were falling. That's also an area going through depopulation, near all of those who manage to go away to college don't return. Yes, those who go to college tend to have longer lifespans than those who don't. It could, of course, still be true that lifespans of all of that original population are falling but we must at least work out whether it is simply this migration of the likelier to be longer lived portion causing the observed effect.

At which point, something from ONS about the UK's regional disparities: 

The fact that, nationally, life expectancy is increasing makes the decrease in the most deprived parts of England and Wales all the crueller. This contrast had already caught my attention when I stumbled across the sentence mentioned at the start of this column. It’s to be found in the section of the ONS report headlined “London has experienced the most rapid increase in newborn life expectancy”. Discussing reasons, the report’s authors remark: “It is also possible that there is a selective migration of healthy individuals from deprived areas to London for employment or other economic reasons.”

What we do about some perceived or measured problem depends upon what is causing it. If it is simply this internal migration then what should, could, or what would we even want to do about it? 

Or as we might put it, we know that a modicum of exercise increases lifespan. What should we do if getting on your bike to look for work is what is producing these longer spans? 

Yet another ridiculous suggestion

The new technologies must pay for the old:

Google and Facebook should offer financial support to help fund a network of professional court reporters across the UK, the former Culture Secretary has suggested.

Tory MP, John Whittingdale, said the technology giants were making huge profits on the back of regional and national newspapers and so ought to consider giving something back by helping to fund local journalism.

He said one possibility was for them to contribute to the local democracy initiative launched last year, which sees the BBC invest £8 million of licence fee money in order to fund 150 local reporters.

We're really pretty sure that we didn't insist that the car companies should pay for the farriers they put out of work. Nor the computer makers for the typing pool, smartphones for the people who collected the money from phone boxes and so on.

In fact, it would have been ridiculous if we did. For the very point of a new technology is that it destroys the old way of doing things, freeing up labour and other economic assets to go and do something new. That new thing being done being the wealth we all gain from the new technology's adoption of course.

It is, of course, entirely possible - no, we don't believe it but we're always open to persuasion - that there is some social, national or even public interest in having a network of professional court reporters. If there is, if that case can be made, then tax is the correct source of funding. If, of course, the case can be made. Rather than trying to charge some private organisation something extra to support the technology it is wiping out.

Or, you know, people could read the online sources available?