Of course big business loves regulation

An interesting little point made in the Telegraph:

In the debate on Britain’s relationship with the European Union, you hear two types of response from business leaders. The first, given generally by those who can afford to pay for large teams of lawyers, compliance officers and Brussels-based lobbyists, is one of tentative approval. The second, inevitably provided by the bosses of small and medium-sized enterprises where every penny must be accounted for and most members of staff have more than a single role, is one of resignation verging on outright hostility.

The point being that big business doesn't really mind regulation because it has the capability of dealing with it while small business hates it with a passion because it does not.

But it actually goes rather further than this. Big business positively delights in much regulation. To understand this we've got to be clear eyed in our appreciation of what the market is really all about. Capitalism, and big businesses are decidedly capitalist organisations, is indeed all about making profit. Get the most out of whatever it is that you're doing. It's the market, the competition that it allows, which is what tempers this this profit gouging. You can't charge what you like for a pint of beer because there's another pub around the corner. Or the supermarket and the couch in front of the telly. Or France sells beer to take home as well.

What regulation does is favour both the incumbents in any activity and also large companies in anytihng at all. For what worries business is not whether they're allowed to do something or not: but that other people will find a better way of doing it and thus compete. More regulation means that fewer upstarts can enter the market and any that do are hobbled by that regulation. The more regulation the more the current large companies can continue to be capitalist without having to worry about their practices being tempered by that market competition.

Which is, as I say, why large companies just love regulation. The problem here is of course that it's also large companies that do all the lobbying. Further, that it's the small and new companies that do most of the innovation and nearly all of the job creation. Meaning, in the end, that it's precisely because large companies so like regulation that we should have less of it.

Postcode petrol prices

Transporting fuel to Scottish islands is an expensive business. This in turn makes motoring on the islands more expensive. The UK government's solution? It gives a 5p/litre reduction on fuel duty on the islands. Which means millionaires who've retired to Arran enjoy a subsidy from poor motorists on the mainland.

So now everyone else wants to get in on the act. There is an election coming up, of course, and now people on 'remote' parts of the mainland – Devon, Northumberland, North Yorkshire and Wales could be in line for the same cut. The Treasury is asking petrol retailers and customers in 25 Counties to provide details of their prices. Well, we know what they are going to say, don't we?

Don't get me wrong. I'm in favour of any tax reduction of any size on any thing at any time in any place. Taxes are far too high. But as well as being low, taxes should be simple. If you are going to tax fuel, or alcohol or incomes or anything else, tax them equally: don't try to use taxes for social engineering. The long-run results won't be happy.

Back in the 1970s, when the UK gave subsidies to 'assisted areas' that were thought to be in need of special support. Of course, everyone wanted the subsidy, and before long, the entire country was one vast 'assisted area' apart from a small pocket in the South East. That is where this kind of me-too politics takes us.

Politicians should not be empowered to favour any particular groups. They should treat us all equally – if we allow them to discriminate, the opportunities for corruption are huge. If people choose to live in remote places, they need to accept the costs of that – along with the benefits, which might include scenery, solitude, simplicity and much else. We should not tax them for the latter and should not subsidise them for the former.

By manipulating the tax system, politicians skew the decisions people make about where they live and what they do. Bit by bit, we end up gravitating to the subsidised places and working in the subsidised industries – instead of going to where we can be most productive in the most productive industries. And then we wonder why the country is broke.

Government in doing something sensible shocker

Sadly though it's not the government that we groan under the yoke of, but the Australian one that has just done something extremely sensible. You may or may not recall that a few weeks back various Oz MPs were getting very hot under the collar about why various tech products cost a lot more there than they do in other countries. They called in the execs and had at them and various fairly weak justifications were offered. Transport costs, small market, high costs of infratstucture and so on. No one quite had the chutzpah to point out that they were simply profit maximising businesses. They charged more in Australia because they could charge more there and that's simply it.

It does appear though that the MPs uderstood what they weren't directly told, for:

Acknowledging that companies have the right to decide the pricing of their own products, the committee made a number of recommendations to address the price of goods in Australia.

Ooooh! What?

It wants the import restrictions in the Copyright Act, 1968 removed and add a clause to allow consumers to circumvent geoblocking to ensure they're getting the best price. It also wants to teach Australian consumers how to get around geoblocking and provide more access to technologies that allow them to do so. Needless to say they will also need educating on how far Australian Consumer Law allows them to go on this.

• If companies do not agree to lift geoblocking, or to give consumers the tools they need to circumvent it, the committee recommended enacting a ban on geoblocking "as an option of last resort". It also recommends voiding any law which seeks to enforce geoblocking.

Blimey, can I emigrate? Politicians make recommendations, based upon the evidence and further, recommendations that will actually solve the problem?

For the companies charge higher prices because they can. Remove their ability to do so by removing the artificial restrictions upon consumers and they will no longer be able to charge those higher prices. Thus they won't.

Isn't this so joyfully different from our own dear Margaret, Lady Hodge, and her practice of offering soundbites without demonstrating any understanding of the basic underlying problem?

An interesting question indeed

Mark Thoma asks an interesting question:

I have a question. Why should government spending as a percentage of GDP stay constant as GDP grows?

Sadly he rather spoils it by providing the wrong answer:

It seems that, as we grow wealthier as a society, we would want relatively more of the kinds of goods government provides, e.g. social insurance.

Nothing is a normal good in all income ranges, a normal good being one that we spend the same portion of our incomes on whatever those incomes might be. Everything is, at some point in the range of possible incomes, an inferior (we spend smaller portions of income as income rises) or superior good.

So, yes, it's entirely true, there is no good reason that government as a percentage of GDP stays static as GDP rises. The interesting follow on being whether we do indeed desire more of such social protection as incomes increase.

And I'd say that we've already gopne over the hump from government being a superior good to it being an inferior one.

Imagine life 200 years ago. Yes, indeed, there was charitable provision for medical care, the invalids and the old: but as it turned out, what the people actually wanted was more than just that charity. The voters voted that they wanted government to provide at least more than had previously been done. Yes, we might argue about this but these definitions of superior etc goods are not about what ought to happen but about what people actually do. And people most certainly have voted to have more social insurance than we had when GDP per capita, in current money, was £2,000 a year or whatever.

However, does this hold true today? For we already have social insurance: pensions for the old, food for those unable to afford it, money for the unemployed, top ups to wages for the unskilled, a national health service, care for the orphans and so on and on and on. If GDP doubled, for example, would we be insisting on having twice the social insurance we currently do? I think not actually, I think that given we do indeed have that desired safety net I think that people would generally regard more government as an inferior good. Something we have less of as a portion of our incomes as incomes rise.

The initial question is interesting and the answer is that there is no reason why government should be a static portion of GDP. But I do indeed think that at our current levels of government and GDP that it has become an inferior good, something we'll spend a lower portion on as we get ever richer.

Milton Friedman on the Negative Income Tax

Milton Friedman was born 101 years ago today. The video above isn't as snappy as many of the great Friedman videos online, but I like it because it shows the kind of libertarian Friedman was. Instead of dismissing any policy that fell short of abolishing the state as 'socialism', he came up with innovative and practicable steps towards a freer and richer world. His policy proposals are still relevant and fresh (unlike many of FA Hayek's, for instance) — as a replacement for existing welfare, a Negative Income Tax today could liberate people from the benefits trap. Daniel Hannan's piece on Friedman and school vouchers — another idea as fresh and important today as it was when he first proposed it — is well worth reading too.

Let's talk about cartels

We generally think that cartels are a bad idea: they're one of those conspiracies against the public that happen when businessmen meet together for pleasure and the like. There have been though those who insist that cartels are just absolutely great. They ensure decent profits for investors and unions can also claim a share of those profits in the form of "good jobs at good wages". Monopolies are just an extreme form of that cartel idea of course, where the cartel is within one firm. And the people who think that those cartels are a great idea really do scan the ideological spectrum. It's implicit in Fascist economics, such as there is an economics of fascism. It's what Roosevelt tried to do with the National Recovery Act (no, I am not trying to state that Roosevelt was a fascist, only that in his approval of cartels he had a similar policy to one followed by Mussolini et al) and it's implicit in all those calls for nationalised industry in Dear Old Blighty, where we can go back to the unions extracting some percentage of the monopoly profits for the labour force.

But we're just seeing a cartel breaking up, right before our very eyes. The potash cartel that is, a vital ingredient of fertilisers worldwide:

OAO Uralkali, the world’s largest potash producer, upended the $20 billion-a-year industry by ending limits on production that underpinned prices and halting cooperation with Belarus that controlled supplies from the former Soviet Union. The decision sent shares of potash producers plunging as much as 27 percent from Israel to Germany to Canada and the U.S. as investors speculated a flood of supplies will lead to prices will sink for potash, a soil nutrient that strengthens plant roots. Uralkali, part-owned by billionaire Suleiman Kerimov, said it exited the venture after Belarus undermined the sales agreements.

The shares of all of the producers plummeted. Clearly, the market was entirely sure that the cartel propped up profits. And the price looks set to fall substantially of the product itself:

“We see the potash price may fall below $300 a ton after the change in our trading policy,” Uralkali Chief Executive Officer Vladislav Baumgertner said. That’s at least 25 percent below the current contract price for China and the lowest since January 2010.

The global market is around 34 million tonnes. Assume that $100 price drop talked about there: that's $3.4 billion that's going to be transferred from the pockets of the producers to the pockets of the consumers. Now what was it Adam said, ah, yes, the sole purpose of all production is consumption and the interests of the producer must only be attended to so far as they are vital to the consumer, or something along those lines, wasn't it?

The breakdown of just one single cartel makes consumers $3.4 billion better off it seems. Which is really why we don't like cartels and monopolies, even if they do end up providing "good jobs at good wages".

Fair trade really isn't the way to do it

There is, as we all know, something called Fair Trade out there. The idea being that you make sure that you're buying only from poor farmers who meet your own moral standards (on things like diversity, sustainability, whatever) and that you'll pay them a bit more for their producing as you would like to see things produced.

This is, of course, just quite lovely. For it is you exercising your consumer choice, spending your pennies as you wish, to make the world a better place according to your lights. We all here support you doing exactly that.

However, you might want to have a little think about this in hte lights of these quite astonishing numbers:

An interesting statistic is that in 2010, retail sales of fair-trade-labelled products totalled about $5.5 billion, with about $66 million premium -- or about 1.2 percent of total retail sales -- reaching the participating producers. There has to be a better way of helping poor farmers. Having only 1.2 cents out of every dollar spent on fair-trade products reach the target farmers is a hugely inefficient way of helping these people. If people wish to help these farmers there has to be charities out there that can transfer more than 1.2 cents per dollar to them.

It may well be that you are exercising your consumer choice as a way to make the world a better place. It's just an incredibly inefficient method of doing so and thus you might want to reconsider that plan.

My own supposition is that the reason Fair Trade is so appallingly inefficient is the number of Interchangeable Emmas who have to be paid from that money supposedly going to producers. It takes very many poor coffee farmers' incomes to pay for the PR bod advertising Fair Trade coffee from an office in central London. It might well be better to simply do as Madsen urges, and buy things made by poor people in poor countries. Then send the money saved by not paying the Emmas off to a charity of some minimal efficiency. Or even, if coffee farmers are really your thing, simply drink an extra cup or two a day and send the money by increasing demand for their production.

You really cannot just plan economies you know

It's one of the standard conceits that the man with a plan can make society better for us all. The standard response to this conceit is Hayek's point, that no one can have enough information in sufficient time to be able to make or manage such a plan. That's why we have to use markets as they're the only information processing and calculation engine we've got that is capable of doing the job. There are, of course, people who prefer to shout that Hayek's all wet and that their plan would undoubtedly work. Fortunately we've already run the experiment, we generally call it the 20th century, and we now know that Hayek was indeed right.

All of which leads to this interesting little tale:

Migration statistics are "little better than a best guess" and probably understate immigration to the UK, a parliamentary report has revealed. With immigration again set to be a key battleground during the next election, a report released today by the Public Administration Select Committee warns that the statistics are not fit for purpose.

Because of the unreliability of the figures, the report adds, the Government should aim for a target of 50,000 if it wants to reduce immigration to under 100,000 by 2015. Estimates of immigration, emigration and net migration are primarily based on a sample of 800,000 people interviewed at ports and airports each year, known as the International Passenger Survey. But only about 5,000 of those tend to be migrants and, in addition, the report comments, these "may be reticent to give full and frank answers, to say the least".

This means that the Office for National Statistics and the Home Office are producing "blunt instruments for measuring, managing, and understanding migration to and from the UK", which do not, the report says, measure the impact of migration on local areas, the social and economic impacts of migration or the effects of immigration policy.

Or as we might put it, we cannot "manage" immigration or the effects of it because we've got no clue at all about how much of it there is. We don't, in fact, know how many people there are in the country, let alone how many of them are native born (it's actually Polly Toynbee who has been saying for years that sewage processing requirements show that there's more people in the country than there are on the books). In such circumstances we simply cannot go about trying to manage things like housing: given that we've no clue of the number of people we can't decide how many houses and or flats there should be. We can only start to look at what the markets are telling us: prices are rising, in fact are at Ungodly levels, and so we need to have more houses and or flats.

How many more? I don't know, you don't know and the government can't possibly know. Just more until we stop having house price inflation.

I should end here with a clarion call to something or other. But I'm not sure that this rises to that level: perhaps a clarinet call. We really have run that experiment about planning and markets. Given that we've received the results, can we please start paying attention to them? We simply do not have, cannot have, the information we need to plan things. That's why we have to use markets.

Simples really, isn't it?

Chart of the week: EU debt/GDP ratios rising

Summary: The UK’s debt/GDP ratio fell in Q1; in most of the Eurozone, it rose

What the chart shows: The chart shows consolidated general government debt/GDP ratios in the UK and the euro area as %

Why is the chart important: One of the main consequences of the Great Recession has been an explosion in public debt. For the time being, the burden of this debt has been eased by ultra-low interest rates. However, at some stage, interest rates will begin to normalise; at that stage, debt – which regularly needs to be rolled over – will become increasingly expensive for governments to service. It is therefore crucial to at least bring the rise in debt under control as soon as possible. Latest data from Eurostat show that UK government debt/GDP fell slightly in Q1 this year. Faster output growth in Q2 means that it almost certainly fell slightly more in Q2. By contrast, for the euro area as a whole – and for all of its members barring Germany and Estonia – debt continued to rise. While output growth is the acute problem, debt is becoming a chronic one which will ultimately have to be dealt with – through repayment or default.

Modern religion is just so confusing

You know I'm sure that somewhere in the foundational documents of Christianity somewhere there's a story about how the money lenders and the Temple aren't supposed to be too closely entwined. I think that was one of the stories beaten into me over those years at the hands of the monks at least, vague memories of shouting and tables being over turned as our man JC told them to get out of his father's house. But here we have the new Archbish of Cantab insisting that the Church of England should actually become the money lenders. Shrug, I guess tempus fugit after all. Jan also had a joke about this idea as well.

However, underneath the inherent silliness is something much more welcome, a definite antidote to the increasingly shrill calls from the likes of Stella Creasey that payday lending must be abolished by legislative fiat. For what the Rev Welby is actually saying is that he wants to drive these lenders out of business by competing against them, not by hoodwinking credulous MPs into stealing away someone's livelihood. Welby is insisting that such short term and low value lending can be done at much lower prices than the current companies manage it. This would be to the benefit of the consumer, as competition always is, and this would thus be a good thing. And we around here do have a habit of welcoming goods things, whatever direction they arrive from.

So, after the sniggers have died away, full marks to Cantab.

Except for just one little detail: I'm entirely unconvinced that it will indeed be possible to offer such low value and short term loans at rates appreciably different from the current providers. It's absolutely possible to offer larger sums at lower rates: it's also entirely possible to offer longer terms at lower rates. But there's an inherent problem in small sums for short terms. There's some overhead to the making of any loan. Some irreducible minimum that it costs to make the decision to grant or not grant the facility. And the shorter the time period and the lower the sum then the more that minimum cost will be as a percentage. And, given the way that APR works, it becomes some vast percentage when a 1 week loan is calculated as if it is a series of 52 one week ones (which is pretty much what APR does).

I've seen a report that Goodwill (think charity shops) tried this in hte US and found that APr was well over 130% without even charging interest, let alone trying to make a profit. So I wish the CoE all the luck in trying to compete in this payday loans market. But I do think that they're not going to get very far. Simply because the costs of lending small sums for short time periods are inherently high.