Things not to do: Cap energy prices

In 1979 my colleague, Eamonn Butler, co-authored a book entitled "Forty Centuries of Wage and Price Controls."  The book showed that, throughout history, all attempt to fix prices by law had led to shortages, economic dislocation and black markets, and had ultimately collapsed. Throughout history, starting with the Babylonian emperor, Hammurabi, people have thought there was a fair and just price for things. Thomas Aquinas thought the same.

Politicians, including Richard Nixon and Edward Heath, have imposed price caps when people thought that businesses were profiteering unjustly when prices of scarce commodities rose. The problem is that price is a signal that responds to changes in supply and demand. When the price rises it tells consumers to use less of a product if they can, or to switch to cheaper alternatives. It similarly tells producers to step up production or to enter the market to take advantage of the increased price. In the absence of that signal those messages are not conveyed.

To impose prices by law is akin to blocking up a thermometer to stop it registering temperature. The heat pumping into a room will continue if nothing is done to stop it, despite the now-fixed reading on the thermometer.  In a similar way, prices fixed by law will do nothing to redress the imbalance between supply and demand that price changes indicate.

Energy prices have many components. They take account of the costs of extraction of the energy source, the costs of processing it, the costs of transporting it, and the costs of distributing it. They also factor in changes in the total demand for energy, something subject to short-term weather and seasonal changes and to long-term trends. Changes in any of these components can affect energy prices, some gradually, some sharply.

If energy prices are capped, energy companies will have less incentive to locate and extract new sources, and some potential sources will be unprofitable to develop at the capped prices. They will have less incentive to invest in new facilities and to invest in upgrading existing ones. The result will be energy shortages in the future. The politicians who enact energy price caps will be bidding for the support of today's consumers at the expense of tomorrow's ones. Pegged prices now will lead to blackouts in the future.

The way to put checks on price rises is to make it easier for new companies to enter the energy market to compete with existing ones, and for consumers to switch easily between suppliers. Competition and the fear of losing customers will restrain companies from raising prices without threatening the future supplies of energy that price caps will.

Even over Brexit it's necessary to use actual logic

The Centre for European Reform tells us that Brexit will be bad, very bad, for us here in Britain. The reason being that they're unable to see the logic of what they themselves are saying. Which isn't when you come to think about it, quite the right way for us to be running the affairs of a nation state.

A UK trade deal with the US will create more problems for British agriculture and food consumers than it would solve.

Their statements are as follows. A trade deal with the US would mean that the US agricultural lobby, something which has a great deal of political power over there, would be able to determine much of the terms under which agricultural trade would take place. Well, OK, let's take that as being true - whether it is or not. They also tell us that lower land prices, greater efficiency and so on make US food cheaper. That is indeed true. Finally, they insist that if the US ag lobby can determine the terms of trade then that will mean the UK would have to have low tariffs and barriers to that cheap US food. OK, again, just let us accept that statement.

They then tell us this would be bad for UK consumers. 

What? Consumers are made worse off by having access to cheap food? In which universe does that happen? 

There's something about this toxic mixture of trade and Brexit that is turning people mad. The entire point of the exercise of trade itself is to gain access to those imports, those things which foreigners do better or cheaper than we do. That's it, there is no other here. 

Seriously, more cheaper food doesn't make consumers worse off. 

Things not to do: Increase Corporation Tax

In the popular mind there is a degree of attractiveness in taking money from profitable businesses and spending it on desirable things such as health and social care. The call for Corporation Tax to be raised resonates with those who think in terms of "corporate bosses," "fat-cat CEOs," and "multinational businesses." Politicians, ever quick to buy votes, note that the likely beneficiaries of spending on such things as health and social care are far more numerous that the board members of big companies, and have far more electoral clout.

There are problems in raising Corporation Tax, though.  All tax is ultimately paid from someone's wallet or purse. Corporations are not people, but the taxes they pay are paid by people.  Studies of Corporation Tax show that it is paid principally by three groups of people: these are the shareholders, the customers and the employees. If some of the profits are taken by government, there is less money to be distributed in dividends to shareholders. If their taxes are increased, businesses will try to recoup it by increasing the prices they charge to their customers, and there will be less money in the wage pool, the sum available to pay the wages of their employees.

Studies show that the greatest burden, over 60 percent of Corporation Tax, is ultimately borne by the workers. The second largest group to pay are the customers, and the third group paying toward the tax are the shareholders. Thus the promise of higher taxes on corporations will impose most of its burden on employees and customers rather than on the faceless corporations who it is claimed will pay them.

There is another problem. It is that increases in Corporation Tax often result in less tax being collected, not more. And reductions in its rate usually yield more tax revenue.  The reason behind this apparent paradox is that the increased taxes make corporations less profitable, so their activity is less worthwhile. Increased investment, which brings expansion and jobs, is less attractive. Businesses do less and earn less, so the Treasury take is reduced. This effect is increased by the higher tax rates deterring foreign firms from locating in the UK.

When Corporation Tax is reduced, however, businesses take the opportunity to expand, and foreign firms to locate here, so the tax base is broadened, enabling more revenue to be yielded on a lower rate.  Practical experience has confirmed this effect. Most recently in the UK, as Corporation Tax has been lowered in stages from 28 down to 19 percent, the revenue yield has been greatly increased. In the year 2016-2017 the tax yielded £56bn, a 21 percent increase on the previous year. In purely cash terms this was still a 12.6 percent increase.

Although politicians talk of raising the tax back up to 28 percent, and how they plan to spend the "extra money," the reality would be that less money would be raised, making spending cuts a more likely prospect than the promised largesse.

Is land banking to blame for the housing crisis?

One of the most frustrating aspects of the housing debate is that even among the people who accept that the fundamental problem is insufficient supply, there are a sub-category who choose not to blame restrictive planning laws but instead lay blame at so-called land bankers.

They point out that the UK’s biggest house-builders are sitting on around 600,000 plots of land with planning permission. As Olly Wainwright at the Guardian points out “that’s four times the total number of homes built last year.”

The idea is that rather than simply build out a new development and sell it on the market, the big house-builders are sitting on land based on the assumption that land prices will rise in the near future. I’m reasonably sceptical that the logic of land speculation works. By forgoing construction in the hope of future land value rises, it suggests that the market is substantially undervaluing the price of land. In fact, they’re undervaluing land to such an extent that it makes sense for house-builders to forgo the substantial income they can get from building on the land and selling it on.

Perhaps this makes sense, if like Daniel Bentley or Liam Halligan, you believe there is a fundamental lack of competition in the housing market. I don’t buy it. It’s true that three house-builders built a quarter of all UK new builds, but three supermarkets (Tesco, Sainsbury’s and Asda) make up more than half of the UK grocery market and few people would argue that supermarket prices are being kept artificially low. In fact, even after the increase in the cost of imports after the EU referendum, UK food prices are still cheaper than in 2013 when a supermarket price war drove costs down.

As my colleague Sam Bowman, points out to me. There are roughly as many major house-builders (about 20) as there are car manufacturers and even fewer smart phone manufacturers, yet I know of no columnist complaining about the ills of car banking or smartphone banking.

So why do developers sit on land with planning permission? A tragically under-read blog by the ‘Unconventional Economist’ has the best explanation I’ve seen. He argues that planning risk is to blame. The land market simply doesn’t function like a traditional “just-in-time” production line where inputs are acquired just as soon as they are to be used.

He points out:

“The answers lie in the fact that the market for land is imperfect and land is not freely available to be purchased ‘off-the-shelf’. That is, a developer nearing the end of one housing development cannot simply phone a land wholesaler and purchase a new parcel of land to develop. Rather, they must: 1) first search and acquire information on what land is available; 2) negotiate with potential sellers; and 3) in the case of markets with strict land-use regulations, they must navigate the planning system, including seeking planning approval.

“If a developer fails to acquire the land and seek planning permission in sufficient time to maintain continuity of production, they risk having their resources sitting idle (e.g. employees, plant and equipment) and may ultimately go out of business.”

Restrictive planning systems mean developers could find future projects scuppered at short notice and create an incentive for firms to store up land with planning permission to keep the conveyor belt moving.

In the areas with the greatest demand for new housing, well-thought out planning applications are often rejected. For example Tory Councillor Judy Terry in a depressing piece for ConservativeHome gives countless examples of the planning system rejecting or slowing down good proposals.

“A campaign to protect nightingales scuppered a scheme to provide 5,000 new homes at the former Lodge Hill army camp near Rochester in Kent when Land Securities pulled out after spending £11 million on the plans, which were approved by the local council but referred to a public enquiry.”


“It took three years for a derelict site in Haringey to eventually win approval, on appeal, during which prices had risen by 60 per cent. A similar story in Ipswich delayed a major project for more than ten years.”

Plus, who could forgot the absolutely bonkers time that 2,000 (!) homes were blocked from development near Canary Wharf (!!) in order to save an ASDA petrol station (!!!).

When developers face such dramatic risk is it any wonder that they choose to sit on land with planning permission rather than building out as fast as they can and running the risk that a few bad planning rejections block the pipeline and leave builders, plants and tools sitting idle

Of all the completely ridiculous things to believe about offshore

Yes, agreed, we're very bullish about offshore and tax avoidance - it reduces the amount that can be shaken out of the rest of us. Similarly, agreed, there are those who don't agree with us. But then, far over on the other side, are people who believe entirely ridiculous things:

The argument that “if you tax it, we’ll leave” is fatuous when the money has already gone offshore. From the perspective of the British economy that money might as well have been taxed at a rate of 100% – it’s not paying wages or buying machinery, it’s just sat idly in Bermuda and other havens, with exactly the same effect on growth as if the government had taxed it into oblivion, and the profits that produced it not existed in the first place.

The ridiculous thing here is to believe that the offshore money just piles up in cash. No, really, Scrooge McDuck surfing down his pile is a cartoon. A joke for kids. That money is invested. Even if it's just piled up in bank accounts the banks then lend it out again (or, for purists, use the deposits to fund loans they've already made). There really isn't any pot of cash or gold sitting somewhere doing nothing.

But even better than this think about what would be true if here were that unused stash. That money is not, therefore, in the British economy. Thus there's no tax avoidance, is there? Because we Brits, the British government, do only get to tax the British economy. The money's not here, it's not invested here, it's not doing anything here, then there are no taxes being dodged, are there? 

The real complaint is that it is invested here, is paying wages, buying machinery, but not in the process paying the vig to Westminster for the privilege of doing so. That's the only way there can be that avoidance (or even evasion) isn't it? Something that's entirely inconsistent with the assertion that it's not here currently, isn't it? 

Then of course we can go off into economics and point out the basics of the taxation of capital. The more you do so then the less foreign capital you're going to attract to be taxed, the more domestic will leave to avoid it. But that would be complicated and subtle, something obviously beyond the ken of the Guardian here given the ridiculous things they seem to believe.  

Three cheers for hospital car parking charges!

Earlier this week, I appeared on BBC Essex to make the case against Robert Halfon MP’s Private Members’ Bill to introduce free parking at NHS hospitals in England. This has already been the case in Scotland and Wales since 2008, but I don’t think we should follow in their footsteps.

I think that there’s two main reasons to oppose free parking in NHS hospitals. The first is about opportunity cost: spending money on this means not spending that money elsewhere. In this case, the opportunity cost of free parking is (according to Rob’s recent article on the topic) around £200 million in foregone revenues. Rob argues that better procurement practices and a continued emphasis on generic drugs could pay for his measure, but even if we can find £200m that way it’s not clear why scrapping parking charges would be the best way of spending it. Local health trusts, not politicians, are best placed to decide their own budget priorities, and I’d be very surprised if they viewed free parking as a better use of £200 million than spending more on frontline care, mental health services, or any number of other options.

The second argument against free parking is that this is not just a poor use of money; it’s actively harmful. Parking spaces, like most things in life, are scarce. Prices act as a rationing device by allocating scarce resources (in this case parking spaces) to those who value them the most. Without some form of pricing, spaces are more likely to be taken by people who aren’t using hospital services or are most able to use alternatives such as public transport: penalizing those who need parking spaces most.

It's obviously a good thing to have a cheap parking space when you really need it, but the most important thing is being able to get that parking space in the first place! This has been an issue in Scotland and Wales, with Wrexham Maelor Hospital and Edinburgh's Western General being two such examples of how free parking can go wrong. Whilst many hospitals already provide free or discounted parking for certain groups (disabled people, long-term patients, and staff), mandating this for everyone is a step too far.

Proponents of free hospital car parking argue that the issue of overcrowding and abuse could be solved with a token system. This would not only mean that are hospitals no longer raising revenue to fund treatment from car parks, but also that they are also going to have to pay for the token systems: including the initial capital required, maintenance costs, and lost staff time. If, as Rob Halfon claims, parking charges operate as a “stealth tax” with no transparency, how are people going to deal with more complicated enforcement mechanisms that people will be even less informed about? The experience of visitors to St David’s Hospital in Cardiff after they were forced to install a complicated registration system is a warning of what might happen:

One employee said:

“This new parking scheme just doesn’t work.”

“People’s main concern when they enter the hospital is to make sure they know which ward to visit, not whether or not they’ve registered their car.

“As parking is free, people get confused as to why they need to do it. I’ve heard countless examples of people being fined because they didn’t understand.

“There’s only so many times people on reception can ask people if they’ve registered their car. I’ve seen visitors reduced to tears because of it.”

In his ConservativeHome article, Halfon makes the point that car parking charges clash with the principles behind the NHS:

Hospital car parking affects everyone who uses the NHS. We cannot say, in good faith, that the NHS is free at the point of access if people face extortionate and unfair car parking fees to get to their hospital appointments, go to work in our vital public services or visit sick relatives.

If you carry this logic to its conclusion, you’d need the NHS to cover everyone’s public transport costs to hospitals, pay for motorists’ fuel, and perhaps subsidize their MOTs if they’ve used their car to travel to a hospital. As Reform’s Andrew Haldenby pointed out when this was brought up a few years ago, most Brits (begrudgingly) accept that there are a small number of things (like prescription charges) that aren’t free on the NHS for common-sense, practical reasons. Hospital car park charges firmly belong in this category.

Minimum alcohol pricing is policy-based evidence-making

The Scottish government can now legally bring in minimum alcohol pricing, which will require alcoholic drinks to be sold for at least 50p per unit of alcohol. For reference, a can of 5% strength beer has 2.5 units and a 750ml bottle of 13.5% strength wine has 10 units, so their minimum prices will be £1.25 per can and £5 per bottle respectively. It’s only likely to affect drinks sold in shops.

The SNP and other supportive groups say that this will be good for people’s health – the biggest boost since the indoor smoking ban, in fact. Their basis for this is that alcohol consumption tends to fall when the price rises, and people with the worst dependencies on alcohol usually drink the cheapest stuff. 

But there’s a leap here. Do heavy drinkers cut consumption when the price of booze rises? Intuitively, you’d think not. As one Scottish Twitter user pointed out yesterday, “People with problems will get what the need even meaning cutting out necessities to do so.” 

The empirical evidence supports this. This 1995 paper found that the heaviest drinkers’ responsiveness to price changes was statistically indistinguishable from zero, though it was based on very old data from the 1980s. This more recent one found that hazardous and harmful drinkers (people who consume more than 17.5 units per week) had a very low response to price changes. And this 2013 review of 19 studies found only two that found a significant and substantial reduction in drinking rates in response to alcohol price rises – “and even these two showed mixed results”. 

This 2016 PhD thesis, by Dr Robert Pryce, found that heavy drinkers’ price elasticity of demand was only barely distinguishable from zero, and concluded that:

the quantity results show that price-based measures will have little effect in reducing heavy consumption because of their small absolute price elasticity, whilst simultaneously having a large negative effect on consumer surplus for the light drinking majority, because of their large absolute price elasticity

Not only do the advocates of minimum pricing ignore this, their most-used model (the ‘Sheffield Alcohol Policy Model’) assumes that heavy drinkers have the highest responsiveness to price changes of all types of drinkers. 

This was pointed out by John C. Duffy, a leading health statistician, in a 2012 report for the ASI that he coauthored with Christopher Snowdon. Duffy is scathing about this model in general, describing it as “resorting to numerology” when desired data was not available. He shows that the assumption about heavy drinkers’ elasticity is extremely shaky, and crucial to the health claims about the policy.

It comes from the fact that heavy drinkers are the most price sensitive to price rises for a single brand or type of drink – ie, heavy drinkers are the most likely group to switch from drinking wine if the price of wine rises, or Fosters if the price of Fosters rises. 

But this does not show that their overall alcohol consumption falls, just their consumption of that type of drink. And does not imply that a general rise in alcohol prices will cause heavy drinkers to cut their alcohol consumption down – the evidence above suggests otherwise. That evidence shows that heavy drinkers are the least sensitive to price rises of alcohol overall. They are just the most willing to switch between types of alcohol when relative prices change. It’s extremely weird that the Sheffield Alcohol Policy Model interprets the data in this counterintuitive and contrarian way.

This assumption is the basis for minimum pricing advocates’ claims about health benefits from their policy, along with poorly identified and statistically sloppy studies of the effects of minimum pricing in British Columbia, Canada. 

As Chris Snowdon points out the most commonly cited study did not include any control group, allowing it to attribute a fall in crime in British Columbia to minimum pricing even though the rest of the country, which had no minimum pricing, and indeed most of the developed world also saw reductions in these things. The UK, so far free of minimum pricing, saw a greater fall in crime over the same period. 

As well as that, it extrapolates wildly from tiny, noisy changes in alcohol-attributable death rates to make big claims that simply do not make sense. A 1% rise in the price of alcohol taking place alongside a 3% fall in alcohol-attributable deaths is not established to be causal, and even worse, is multiplied by ten to produce a Daily Mail-friendly headline that a 10% rise in price would cut alcohol deaths by 30%. It’s 'evidence' in name only.

My opposition to minimum pricing isn’t just that there is little to no evidence in favour of it. It is that it causes harm to many people. Many non-problem drinkers like cheap beer and wine from Aldi and Lidl – I’m a big fan of Aldi’s 75p/can Reinbacher pilsner and Lidl’s £4.29 Cotes du Rhone, for instance.

All of those people, many of whom will be on tight budgets already, will either be made poorer, if they keep drinking, or unhappier, if they have to cut down or stop. Problem drinkers, since their elasticity is low, will be much poorer and may cut down on things like heating, and street drinkers may resort to bootleg alcohol or worse. Remember, too, that tax revenues go to the government, but minimum pricing ‘revenues’ go to supermarkets.

Once implemented, the policy will probably ratchet upwards too. 50p/unit is on the lower end of minimum pricing advocates’ target – most would prefer to start at 70p/unit and work upwards from there. And the traditional objective of policies like this, pricing in the negative externalities caused by drinking, is much better achieved through tax, since people who drink expensive alcohol to excess are just as likely to be problems to others as people who drink cheaper alcohol to excess. 

Worst of all, I doubt that the Scottish experience, assuming it does fail, will end up giving us evidence to put English politicians off minimum pricing. Minimum pricing advocates have shown a willingness to distort and misrepresent the evidence to further their goals, and will probably hold up Scotland as a success no matter what happens there. ‘Policy-based evidence-making’ has got them this far – why stop now?

Things not to do: Reintroducing rent controls

Some policy proposals are being advocated as if they were pure theory, untested, and capable of being implemented as suggested. In fact many of them have been tested and found to produce adverse, sometimes disastrous, results in practice. Those proposing them seem to have no sense of history or any understanding of economics and the way the world works. Some of the most absurd have shown, sometimes repeatedly, that they fail in practice; others have produced in practice the very opposite result of what they were intended to achieve. The real world has already passed its verdict on many of these fanciful and dangerous proposals.

Rent controls

Wherever they have been introduced rent controls have led to a shortage of rental accommodation and a deterioration in its quality.  When Britain had rent controls there was a chronic shortage pf private rented accommodation. Those who became landlords could easily transfer their funds to other investment classes instead. If there is insufficient return from property, they will choose other things to gain greater returns.

Rent controls involve having rents limited by law to below what would prevail in an open market by the ratio of demand to supply.  Given below market returns, landlords have tended to withdraw from the rental market, to sell their properties, and to invest elsewhere.  The supply of rental properties diminishes in consequence.

Furthermore, with less money coming in from their investment, landlords tend to scrimp on maintenance and renovation. They choose to cut their investment because it now brings inadequate returns. General maintenance slips back on things such as damp and rot treatment and repainting and refurbishing. Rewiring and re-plumbing are postponed, and the physical condition of the property declines.

The Swedish economist, Assar Lindbeck, made a study of rent control in many cities and found a similar pattern emerged.  He famously remarked that, "next to bombing, rent control seems in many cases to be the most efficient technique so far known for destroying cities." In fact rent controls only take out supply of housing, leaving demand unaffected, whereas bombing kills people as well as destroying houses.  It could be argued that it is worse than bombing.

Rent controls are politically attractive because they promise to peg rents for those already in rental accommodation.  They do so at the expense of the people who do not have, but wish to have, rentals themselves.  The present renters vote, the future ones do not, so the politician promising rent controls gains the votes of the former without losing votes from the latter.

As the EU obviously knows, one should never let a crisis go to waste

The method of not wasting a crisis is well known. Declare that something must be done, that something quite possibly unrelated but something you wanted to do anyway. Thus it is with tax laws and the Paradise Papers:

Pierre Moscovici, the European commissioner for economic and financial affairs, blamed the inability of countries to agree on a common set of corporate rules for the “aggressive” tax planning policies of some companies.

He said a tax avoidance scandal exposed in the Paradise Papers last week could have been avoided had member states adopted the commission’s proposals, including a common consolidated corporate tax base (CCCTB) which Ireland strongly opposes. Yesterday, Mr Moscovici set out a new timeframe which called for agreement to be reached by the end of next year — two years early.

We are all terribly surprised, aren't we? As is being pointed out, this isn't really about offshore at all:

“Commissioner Moscovici’s comments regarding the causal link between a lack of common corporate tax practices across the EU and the recently exposed tax optimisation schemes as outlined in the Paradise Papers don’t stack up. None of the jurisdictions referenced in the Paradise Papers are members of the EU, and are not subject to the rules governing the union.”

What this is really about is the distaste, hatred even, of the tax collectors for tax competition. All of the rest of us, of course, should be in favour of the competition. For we do all agree that monopolies are a bad thing for us out here, don't we? So it is if all governments shake the same amount out of our wallets - that denies us the right of exit. Leaving and paying nothing being one of the most obvious methods of reducing the demands being made.

We actively desire tax competition therefore, not these attempts to abolish it.

A major problem with Keynesian economics is political - in fact, politicians

Steve Horowitz has a good piece detailing one of the basic problems with Keynesian economics. In a formal sense we can say that this is the addition of public choice economics which makes it not work in the real world. For the incentives faced by politicians are that they're only likely to do half of the idea, not all of it.

Keynesian economics changed all this by constructing an intellectual justification for viewing the federal budget as a tool for managing the economy rather than a constraint under which politicians operate.  Keynesianism argued that in recessions budget deficits could stimulate aggregate demand and lead to recovery, while in good times surpluses would both prevent excessive growth and pay back the debt.

This idea, known as “functional finance,” looks good on the blackboard but has a fatal flaw.


We must ask: Under the incentives built into our political institutions, is functional finance in the politicians’ self-interest?

Buchanan and Wagner say no.  Politicians love deficits because spending on their constituents gets them votes but raising taxes costs them votes.  Politicians are always vote-seekers, so those incentives and disincentives hold whether the economy is in a recession or a period of high growth.  Surpluses in growth periods are incompatible with those incentives.

That fixing the roof while the sun is shining that Keynes talked of never really does seem to happen.

Our own favourite example of this comes from Polly Toynbee. Certainly, that's not where we're going to go look for economic advice but as a measure of the political wind she's pretty good. It's instructive to read her pieces from the 2005 to 2007 period at the Guardian's archive. She notes the flood of money coming in from the taxation of a booming economy And uses that flood as the justification for setting up vast new redistributive programmes to beat child poverty (really, inequality) and so on.

Without noting that a budget surplus at the peak of this country's longest and largest peace time boom in modern history really might be a very idea indeed. A time to be paying down that national debt, not increasing it as G. Brown continued to do.

As Horowitz says, whatever else we might think about Keynesian economics the exigencies of politics mean that we don't actually follow those rules anyway - thus, sadly, it doesn't work over the long term.