Unfinished business at the airports

Our 1984 paper Airports for Sale, by the noted transport economist (and now Irish Senator) Sean Barrett, put airport privatisation on the agenda in the UK. Dr Barrett showed why the six airports of the then British Aviation Authority (Heathrow, Gatwick and Stansted around London, and Glasgow, Edinburgh and Aberdeen in Scotland) should be sold separately rather than as a unit, so that competition and fresh thinking could come in to the UK's state-run airport sector.

Sadly, the Thatcher government – rarely as radical as people on either side suggest it was – thought it much easier to privatise BAA as a unit. A company of that size could be sold easily to the public through the stock market, a monopoly provider would bring in a higher price, there would be none of the legal or accounting problems that might be caused by a break-up, and the sale could go through much faster. Competition, they told us, could come later.

So the state airports monopoly (or near-monopoly: there were other notable local-government owned airports such as Manchester, East Midlands, Bournemouth and Luton) was turned into BAA plc and sold as a block. It has taken nearly thirty years, though, for the first prospect of competition cracking that block, and the cracks aren't all that deep.

Spanish-owned company Ferrovia took over BAA a few years back, but the Competition Commission later ruled that it should sell three of its airports – Gatwick and Stansted and one of either Glasgow or Edinburgh - to help create competition.

Gatwick was at least sold to a private consortium, the US-based investment fund Global Infrastructure Partners. Though GIP also owns London City Airport, so you could argue that there is still a monopoly element in that. And as I explained in January, Stansted has been sold too - but to Manchester Airports Group, which is entirely owned by local authorities. So that is hardly an injection of dynamic private-sector thinking. And what are local authorities doing running airports anyway?

The most promising sign is that Gatwick is now pushing the regulatory, the Civil Aviation Authority, for more operating freedom. It is demanding freedom to expand, and wants to be allowed to offer discounts to Far Eastern airlines. It sees a niche in attracting more flights from China, Indonesia, Korea and Vietnam. Current CAA regulation insists that all airlines should be charged the same, around £8.80 per passenger. Why? Steven Wingate, chief executive of Gatwick, says his plan would be a victory for competition over regulation. He's right.

Loan subsidies are the same old government picking losers stuff

This little story is instructive as to what is really happening in our bright new world:

The Treasury is to underpin a £75m loan for the Drax power station in North Yorkshire, marking the first project to be financed using the Government’s £40bn infrastructure guarantee scheme.

Even the Labour Party understands these days that government coughing up the money for one specific firm or another, even one industry over another, doesn't really work. For the money ends up going to those politically favoured rather than those best able to use such aid. So the code words have changed: now we're supposed to applaud "investment" in "infrastructure". Or greenery. Or perhaps just the subsidy to interest rates to those engaged in such activities. This apparently is much better as it means that the market will decide who gets the subsidy.

Except of course nothing has actually changed. Here we've got money going to Drax. In order to change over some of the boilers from burning coal to burning wood pellets. Wood pellets that will have to be sourced from thouswands of miles away so great is the volume required. Far more than Britain's forests could possibly provide. Wood pellets that are actually much more polluting than coal too.

And why is Drax converting from cheaper and cleaner burning coal to wood pellets? Because the EU says that it should. So we've not in fact got markets allocating anything at all here. We've one level of government picking a loser and another coughing up the subsidy for that losing choice.

As I say, nothing much has changed, we've still got the same groups of bozos wasting our money. The only real change that has happened is that it's now rather more difficult to kick them out of office for being bozos. This is not an advance in the necessary management of politicians.

The small businessmen bamboozled by the tax campaigners

Regular readers will know that I enjoy making fun of certain of the tax campaigners. And some of it is just fun, pointing out their bloopers. But there do come to be times when I get rather angry at the lies and obfuscations they peddle which bamboozle the good people of this country. Take for example this little story:

Supported by Stephen Fry, Margaret Hodge and Charlie Higson, independent booksellers Frances and Keith Smith delivered a petition calling on David Cameron to take "decisive action [to] make Amazon pay its fair share of UK corporation tax" to Downing Street on 24 April. Over 150,000 people have joined the Smiths' campaign, which they launched last December, saying that "we pay our taxes and so should [Amazon] – please take a stand with us and tell Amazon to pay their fair share".

There's an awful lot of effort that's gone into that. Effort which would have been better directed elsewhere. At least if it had been directed at changing nappies the babies would have been happier: here the effort is entirely wasted.

"Times are tough and getting tougher," the Smiths write in their petition. "We face unrelenting pressure from huge online retailers undercutting prices, in particular Amazon, and it's pushing businesses like ours to the brink. But what's even worse is that Amazon, despite making sales of £3.3 BILLION in the UK last year, does not pay any UK corporation tax on the profits from those sales. In my book, that is not a level playing field and leaves independent retailers like us struggling to compete just because we do the right thing."

There are several points that could be made. One being that selling to Brits from Luxembourg is not tax dodging, it's exactly what the EU intends the Single Market should be. A, umm, single market across 27 countries. A second might be that even if we start to whine about UK warehouses, tax is still not due here. Our double taxation treaty with Luxembourg means that such warehouses do not lead to tax being due. And that's from 1968 or so when Wilson ruled: it's also a standard part of all double taxation treaties and for good reason.

(For example, the metals trade uses warehouses in Rotterdam as the point at which a contract is concluded. The cut flowers business warehouses in a small village near Schipol. Should Holland get all the tax from the world's metals and flower businesses? Or should everyone be taxed where they really are, not the warehouses?)

But there's much worse than this. We've had the Margaret Hodges screeching that we're talking about immoral, not illegal. The TJN and other fools similarly scream about how awful it is that people can do business without paying tax. And it is precisely all of this activism that leads these gentle booksellers to spend their year collecting signatures. To absolutely no avail whatsoever.

For in the year they are complaining about, last year, 2012, Amazon did not make a profit. A $39 million loss in fact according to their accounts. It's simply not true that "tax dodging" by Amazon is leading to the crucifixtion of the independent book shop. That's a lie that's been foisted upon people by the obfuscations of the campaigners.

In fact, if we were to use the favoured "unitary taxation" model that the likes of the TJN are now pushing Amazon would be due a refund, or at least a discount off any future taxes. And how the heck will that help bookstores?

Which is where we come to the major problem that angers me. The lies that are told by the campaigners lead to people wasting their time. There just isn't any tax that Amazon owes anyway. Worse, the Prime Minister of the UK doesn't have any ability to make them pay any anyway, that's all been handed over to the EU. Vast effort wasted on a petition that cannot do anything, about tax which doesn't even exist, delivered to the wrong person. Doesn't that make you angry, that the self-appointed should dissimulate so that the citizenry are that befuddled?

An end to zombie politics 3: The regions

The urgency of relief from Zombie regional policy was brought home by the street-parties celebrating the death of Baroness Thatcher, the palpable bitterness of regions eviscerated by a century of rotten policy. Originally I planned this post for financial regulation, but as recent banking failures hinge upon regional policy, let’s turn to this instead.

First, some international context: from the outset of the financial crisis, thoughtful Americans noted that subprime borrowing was stimulated by policies promoting home-ownership among uncreditworthy minorities, unreached by general prosperity. Good intentions went wrong.

And now we begin to grasp where our own good intentions went wrong. On 5 April, the Parliamentary Commission on Banking Standards called HBOS’ failure what it was: plain bad banking, nothing to do with alphabet soup, bonuses or the other usual suspects. This paves the way to face the fact that HBOS’s collapse tallies with Bradford & Bingley, Dunfermline, RBS and Northern Rock - all failed “country banks”.

Let’s pass over financial regulation till another blog, reverting to today’s theme: that the decline of Britain’s primary industry prompted 100 years of awful policy extending from white-elephant investments, through piecemeal subventions, to the Blair-Brown wheeze of public-sector and financial employment, the latter not just back-offices but regionally based banks with national ambitions, political patronage, and - as it turned out - disastrous business models.

Regional regeneration is uphill sledding: Dorling and Thomas point to the UK’s profound regional disparities and the inverse relationship between public expenditure and prosperity, while Polèse captures the agony for once proud regions of accepting lower cost-bases. So let the Tories reconnect with voters outside the Southeast by repudiating Zombie policies and proclaiming two clarion objectives: immediate relief and eventual reskilling.

Policies for immediate relief: 

1. Let HMG kick off with tough love, doing its bit to make regions more competitive with regional wage differentials for its own staff. The pill’s bitterness is best sweetened by letting national inflation operate upon salary-sheets redrawn to equalise employees’ purchasing power from region to region.

2. My last blog touched on the opportunities for the North opened up by fracking. All over the world, hydrocarbon development promotes “roustabout” outfits offering drilling, wellhead and other services, all fostering local proprietary skills. So let the Department of Communities and Local Government issue guidance encouraging the construction or conversion of property for such entrepreneurs. At the same time, let the Treasury offer holidays on their national insurance and corporation tax. Finally, let the Department of Employment relieve them of the restrictions of wage and employment regulation.

3. The population is ageing and the retired no longer necessarily hard up. So let regional developers and operators of retirement communities enjoy relief similar to that set out above.

Policies for eventual reskilling: This goes to rebuilding technical, entrepreneurial and political skills. Let’s pass over general education, hoping that Michael Gove’s reforms catch hold; and local funk, often stemming from underfunding and addressed in my last blog. The last government pushed large-scale public sector and financial employment with grisly results, teaching us to field other industries and more resilient structures.

4. The Treasury plus the Education and other ministries should goose up university development offices seeking to engineer regional knowledge-based clusters, with regulatory concessions, tax holidays and other Enterprise Zones elements. Heaven knows how hard it is to pick winners, so let HMG also be promiscuous with funds for start-ups to match arms-length private money.

5. The promise of creative and healthcare industries is all too often stymied by BBC and NHS jobsworths. So preparatory to more fundamental reform, let’s decentralise programming for license-funded broadcasters outside London, pushing the consequent local content to rise to the challenge of a high bandwidth world; and let the Department of Health operate a presumption of approval when commissioning bodies in the regions propose innovations in secondary provision. And note, creative goes well beyond TV, embracing business communications, design, fashion, performance art plus social and other media/software, most of these inherently small-scale. 

Power to the press

The Newspaper Society, representing a large wodge of UK newspapers, have rejected the Leveson Report plans to regulate them and are publishing their own proposals for self-regulation - backed by a Royal Charter. All power to them.

After the phone hacking scandal, which brought down the News Of The World, the government and the opposition in the UK came to endorse the idea of an official press regulator, set up by Royal Charter, with powers to fine newspapers and demand they print prominent apologies. Trouble was, these discussions deliberately excluded the newspaper industry.

They point out that phone hacking is a crime, and that there are perfectly good laws to deal with it, without having some lumbering press regulator. Indeed, we haven't had press regulation in the UK for three hundred years, and with good reason – once government officials are put in charge of the press, there is very little hope left for free speech, as a number of international media bodies have already pointed out. It might take time, but gradually the press would become agents of the prevailing government. Indeed, it would not even take specific interventions to do so. All the regulator has to do is raise an eyebrow - and a press that could be fined very heavily, or told what to print, would quickly take the hint.

The Newspaper Society's proposals would deny Parliament free rein to change newspaper regulation as it pleased – an important safeguard of free speech. Instead, the regulator and the media would have to agree. They also call for members of the regulation panel to be appointed by retired judges, with various interests (including the press) represented. Former editors could sit on the panel (the government's plan would ban them), which is important in order to have a proper discussion, after all. Media customers would have a say too – and let's face it, this is all about them. And there would be limits on what the regulator could demand newspapers to print by way of apologies. Which is good. One can think of a point in the future where some newspaper exposes government wrongdoing and is then forced to publish a two-page endorsement of everything the government does.

If anything, the Newspaper Society should have been tougher with these proposals. Their proposals would still allow for fines of up to £1m, and strong investigative powers from the regulator. And let's face it, there are already plenty of laws out there to protect people's privacy (where this whole thing began) and who break the law should be punished. But our newspapers have a vital role in exposing the shortcomings of the establishment: they need to be free to do so. We don't need a new regulator to do these things. The trouble with regulation, in any case, is that it usually has the opposite effect of that intended. Competition between different media is probably a surer way to keep them clean.

Vouching for liberty in education

Victoria Monro was the runner-up in this year's Young Writer on Liberty competition.

Regrettably, one of the most sensible, pragmatic, and consequentially sound policy ideas of our time has never made it into policy – the education voucher.

The best version would be an education voucher, distributed annually to parents for each child, to be redeemed at any school of choice. In some cases, it would cover the full cost of a year’s tuition, in others, it would contribute to the cost with the parent topping up the remainder. The purpose of implementing a voucher is twofold. Firstly, it would provide an introduction of free-market practices to the sector, without being so radical as to be a complete privatisation.

It retains the element of public sector provision that would prevent an outcry – so-called “free” provision, whilst enabling the positive consequences that would speak for themselves, and remind the populace that a sector can be productive, successful and efficient without government intervention. Correctly applied across, it could pave the way for the gradual but meaningful movement towards a more economically-free society.

Secondly, the policy would reinforce the choice element of demand. The government would not be permitted to stipulate which institutions the vouchers could be used at, only which child is to be registered for education. New private schools could establish themselves as educational institutions and accept the vouchers as full payment, providing direct competition with the state alternatives. Like other private schools, they would have the ability to earn profit, and so new entrants would enter the market if they felt they could favourably compare both financially, and qualitatively, with the incumbent state comprehensives, whilst turning a profit. They undoubtedly could.

The idea of parents being allowed to choose schools due to location (“catchment area”) would be replaced by a business ethos – accepting parents and children, rather than turning them away based on their postcode. It would challenge the state-dominated status-quo.

Just like with most other service areas, people choose to purchase what gives them the most for their money. Educational quality is easier to measure than most, given as “quality” is based on exam results and league tables; this information about a school’s achievements is readily available from numerous sources.

There’s no reason for the State to maintain an iron-grip over how our children learn. Slowly, we can move to a situation where families choose and pay for the education provision themselves. This is the first step to getting there.

The euro is at the root of Ireland's economic disaster

"Most of the Irish establishment is sadly mistaken in thinking that our problems are rooted in rogue banking behaviour or lax political oversight. The real problem was systematically mispriced credit resulting from our EMU membership." So says Cormac Lucey at Liberal Ireland, who argues that the factors in Ireland's ruin all seem to have one point of origin — the euro. Here's a graph of Dublin property prices, before and after entry to the euro:

The problem is that nobody can know what the natural rate of interest should be to prevent excess savings or borrowing. I am probably in a minority of people who think that euro rates were both too low during the boom, and are now too high — the worst of both worlds and a major factor in the Eurozone's continued recession. Contrast that with a country like Sweden, which has managed to keep nominal GDP fairly steady over the last few years and has avoided the worst of the global recession. As a less-bad option, the case for lots of different central banks with their own currencies trying lots of different monetary policies grows.

The costs of inflation

Osborne bungles banks – again

It will be a while before the inside story of the Co-op’s pull-out from the Lloyds HBOS deal emerges, if it ever does, but some aspects are immediately apparent.  The HM Treasury has failed, at least for now, to achieve their twin goals of downsizing Lloyds HBOS, as required by Brussels, and bringing competition to the retail banking sector.  The deal could have transformed the Co-op from a small player to a serious retail bank.

Any deal would be a commercial issue, but surely HM Treasury played some part.  Apparently excessive regulation is a major reason for the pull-out, a direct government responsibility. Whatever happened to de-regulation?  Yes the Financial Services Authority was eliminated but it was replaced by two further monsters, the Financial Conduct Authority and the Prudential Regulatory Authority.

As the IEA has pointed out, we do not need capital ratio regulations, or not now anyway and as this institute has pointed out, financial services markets are now global and therefore need global, not local, regulation.  The UK simply hobbles itself by adding its own unilateral regulations and regulators.

Capital Ratio regulation is a good example of the right medicine at the wrong time.  It was needed in the boom times up to 2008 but is counterproductive in recession: more capital means less lending.  It is like going to the doctor, asking for a cure for a throat infection and being given a prescription for piles because the doctor has suddenly realised that he should have provided that when you last visited.

Osborne also bungled by handing out cheap money for the banks to lend out only to find they put it in their own pockets.  The fact is that he does not understand banks, bankers or banking.

The Co-op has effectively told government that the climate is unattractive for this deal.  And since it has been in the works since last year, they must have been saying so for some time.  The collapse tells us that HM Treasury failed to deliver.

Lloyds HBOS won’t mind too much.  Yes they are under pressure to dispose of the packaged up TSB but they’d rather sell to a newcomer or a tiddler than create a serious competitor as the Co-op could have become.  It is nonsense to say that HM Treasury cannot manage the market since they contributed to the current mess and own, in effect, two of the big four. HM Treasury could have leaned on Lloyds HBOS to sweeten the deal to make it attractive to the Co-op but they evidently did not.  Another bungle.

Maybe some white knight will ride in and save the situation.  Let us hope so but I would not bet on it.   

The national debt is rising. Who will pay the bill?

George Osborne will derive little comfort from today's deficit figures, which show the public sector net borrowing requirement down only £0.3bn between the 2011/12 and 2012/13 financial years, after accounting for one-off effects. This puts borrowing at £120.6bn, after last year's £121bn, and ahead of 2014/15's projected £120bn. Total debt stands at £1.19 trillion, or 75.4 per cent of GDP, the ONS says up from £1.10 trillion, or 71.8 per cent of GDP a year before.

A tired – but apparently necessary, given public misconceptions, fuelled by confusions over the debt/deficit distinction from politicians of all strips – point, is that this shows just how much the debt is still going up despite the Treasury's Plan A. I wouldn't draw from this that austerity is not happening – some budgets are being cut very quickly, and overall spending is expected to fall a significant 2.7 per cent between 2010/11 and 2017/18. But debt is rising very quickly.

The revelation of the spreadsheet errors in Reinhart & Rogoff's influential paper (which said national debts above 90 per cent of GDP could slow growth) means we may have less reason to fear high debt. But we may still have concerns about the redistributive effects of government debt, at least if we've read recently-departed Nobel laureate James Buchanan's work on public finance. Governments borrow to use resources without depriving the taxpayer. But these resources have to come from somewhere (assume full employment or a central bank meeting a nominal target).

Those who buy the gilts, or T-bills, or bunds, pony up the resources now, in return for a better investment opportunity than was available elsewhere. But assuming that households do not act as infinite dynasties, valuing future generations equally to themselves and therefore assuming households do not save now to pay for the inevitable future taxes (i.e. Ricardian Equivalence does not hold) – then future generations will shoulder the burden.

On the one hand, future generations are likely to be much richer than us. This is a trend that has gone on for at least 250 years in the UK, and for shorter periods elsewhere. In some countries it has gone in reverse (spectacularly in Argentina). But on the whole, we can expect future generations to be richer than us. So why shouldn't they shoulder the burden, given their broader shoulders?

This argument is fairly convincing, but it only goes so far. No one would suggest it would be fair to redistribute infinitely toward users of state-provided services and towards bond-buyers, away from future generations. After all, given the secular decline in growth we've seen since the Second World War, they may not be as much more prosperous than us than we are over our parents. As ever in numerical issues, the question may be one of finding the right balance.