Blog Review 783


How confused are farmers getting over the dairy market?

And how bad a deal are we getting from the PFI schemes?

There's also a problem with having a committee deciding what medical treatments the NHS will pay for: clearly, those who provide certain medical services will compete to get on that committee.

Gordon Brown does seem to have a little of the control freak in him, no?

I know John Redwood Mr. Purnell and you are no John Redwood.

Booze in inflation adjusted money terms is about what is was in 1909 and yet a great deal cheaper compared to average earnings. Except for Bordeaux, strangely.

And finally, the most useful political website of our time.

Online transparency


altThe Public Accounts Committee of the House of Commons is annoyed that the BBC won't open its accounts to deeper public scrutiny. Apparently the Beeb has gone to some lengths to thwart the National Audit Office – the official scrutineer of the public finances – to prevent the publication of the salaries it pays to its top presenters.

In a BBC News interview on 11 May, Labour Peer Lord Foulkes turned on presenter Carrie Gracie, forcing her to reveal she was paid £92,000 a year – one-and-a-half times the salary of a Member of Parliament. But then she probably doesn't have a second home allowance. Or does she? I think we should be told. (For the record, I think Carrie Gracie is about six times more useful than the average MP, so she's actually pretty good value for money by government budget standards.)

The BBC is a public corporation, funded by £3,000m a year of taxpayers' money. Yes, we want to maintain its independence – though frankly, it would have far more independence if it was privatized and did not have to keep the politicians sweet by laying on all those 'public interest' broadcasts whose sole function is to allow politicians to preen themselves in front of the political junkies who watch this kind of stuff. But taxpayers have a right to know how public bodies are spending their money. That means all public bodies – Parliament, government departments, local authorities – and quangos.

If we're forced to pay taxes, we should at least have the right to know how they're spent. Who is paying how much of our cash to whom? It's a simple question. And the easy way to answer it is to post on the internet every cheque which government and public bodies issue. Then concerned citizens and the media can spot irregularities. MPs being paid for duck islands? Council bosses giving lucrative contracts to their in-laws? Quangos spending more on PR and offices than on their job? Online transparency should be a basic principle of public finance.

Daily Mail: The lump(en) theory of wealth


One of the more persistent fallacies in economics is “Lump Theory": that there is only so much to go around and the question is how it is share it.

The most common example of this is the Lump Theory of Labour, where new entrants to the job market are alleged to take away work from existing workers. This is usually used to bash immigrants, though it has in the past been used to argue for the Closed Shop and for restricting labour-market participation on grounds of gender, age and race.

Another example is what we might call the Lump Theory of Wealth, the Mercantilist belief that money leaving the country means less wealth for citizens. This ignores the rather simple fact that pounds are pieces of paper whereas the stuff they buy is usually far more useful: are we really poorer if we give a Chinaman twenty five pieces of paper, each of which says “Ten Pounds" on it, and he gives us a television? It also ignores the fact that pounds can only be spent in the UK, so eventually they must make their way back here either to buy our exports or as loans to government, business or citizens.

Monday’s Daily Mail had a textbook example of this in the article 'Immigrants send home £4.9m a day'. According to the Mail, “The economy is losing £4.9million every day because of the huge sums immigrants send home to their relatives..." Migrationwatch, the anti-immigration lobby group, suggested that this is enough to build two new aircraft carriers and argued that “claims that there are only positive economic benefits from mass immigration are clearly untrue."

All exchanges in a free society are voluntary; both parties benefit. If companies are paying foreign workers £4.9m a day (for the sake of argument let us ignore the difference between wages and remittances), it must be because companies (and therefore Britain) must be getting something that in the companies’ judgement is worth more than £4.9m. For example, if those foreigners were employed in ship yards, they would get £4.9m a day and we would get (say) Andrew Green’s two aircraft carriers. Thus the labour that these migrants are selling to the UK is beneficial to us.

What is more, those £4.9m cannot be spent abroad: the pound is not legal tender there. At some point the pound must return to the UK, either stimulating exports or providing much-needed credit to UK industry or government. Thus, having gained from the labour of the migrant, UK businesses then gain from the desire of his family to import goods or lend money for profit.

Sadly, this simple economic logic is beyond the lumpen intellect of Migrationwatch and the Daily Mail. To them, as to the Mercantilists against whom Adam Smith railed 233 years ago, the wealth of nations is a zero-sum game expressed by the flow of money.

End specialist mobile telecoms regulation

The report identifies a number of specific examples of a heavy-handed regulatory approach, including:

  • Micro-management of customer service: Ofcom is asking operators to gather and publicise information of no interest to customers
  • Efforts to improve price transparency on national numbers that may lead to Ofcom setting the price of individual calls
  • Slow regulator reaction over misselling complaints – industry self-regulation reduced complaints by 95% while Ofcom were still drafting their consultation
  • Attempts to reduce the time to port a number between operators to less than 48 hours, even though this timescale is satisfactory for consumers
  • Demanding mobile providers deliver 100% mobile coverage across the UK, even though this would take resources away from investment in new technology and improved services.

The report sets out a series of recommendations which emphasise the ample opportunities for Ofcom to withdraw from detailed regulation. With this goal in mind the report recommends that the regulator should prepare a timetable for phased regulatory withdrawal across the sector. In this context, it is important to note that the recently strengthened EU Consumer Rights Directive provides an unprecedented opportunity to wind up sector-specific consumer rights regulation and replace it with a set of robust consumer rights based on the new EU Directive.

Accordingly, the report calls for a systematic toolkit to be developed in order to stimulate greater competition and ensure that consumers enjoy similar rights across a raft of sectors, such as energy, telecommunications and water services. This should be a welcome development for consumers who should find such an overhauled system easier to use and consistent across the entire range of goods and services offered in the UK retail market.


altIn a new study published this week the Adam Smith Institute’s Senior Fellow Keith Boyfield argues that regulation of mobile telephones in the UK is far too detailed and cramps innovation. It needs to be rolled back to allow this highly successful industry to adapt to the next wave of technological change. The report, entitled Regulating Mobile Phones: A fresh look, published by the European Policy Forum, points out that the mobile sector is characterised by a wide raft of suppliers who have delivered consumer satisfaction rating of 94% - far higher than other markets such as rail, water and energy. They have also provided tremendous value for money: prices have tumbled by 17% a year over the last five years.

Why then is Ofcom, the sector regulator, showing increasing signs of wanting to tighten its regulatory hold on the mobile telecoms market? It is currently in the middle of a Mobile Sector Assessment exercise aimed at reviewing its whole approach to regulation. However, there are few indications that it is seeking to withdraw from regulatory intervention in the market.

Keith’s study identifies a number of clear disadvantages in Ofcom’s current approach and the damage to the market caused by unnecessary regulation. Ofcom’s micro regulatory management has limited innovation by reducing competitive advantage; it has further limited the incentive to invest in new products and services. Ofcom’s regulatory approach has tended to focus too much on the concerns of a few voices rather than the bulk of consumers. As a result, overall costs – and prices – are higher than they could be if market mechanisms were unshackled. ‘Relations between the sector and the regulator do not reflect the achievements of the market’, says Keith. “Increasingly regulation is a hindrance to the consumer. The pace of technological change in the sector is not slowing down, providers must continue to adapt. Heavy-handed regulation weakens incentives for investment and opportunities for innovation.’

He adds, ‘Ofcom needs to adopt best practice in regulation – which is to step back where competition is delivering for the consumer. Regulation will always be a second-best approach to meeting consumer needs. Successful sectors often outgrow the regulator. We no longer have specialist regulation of fixed line telecoms, the time has come to withdraw from mobile specialist regulation as well.’

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Blog Review 782


Strange really, incumbent politicians seem to be the only people who don't want to see market structures brought into politics.

If the economy is recovering now and we haven't spent the stimulus, then it can't be the stimulus which is recovering the economy, correct?

A more considered and lengthy consideration of the same problem.

Price discrimination is a quite wondrous thing.

Forget the policy for a moment, wouldn't you like a politician with this sort of comeback?

The truth about technical analysis.

And finally, Netsmith never needed this. Who hands in essays anyway?

UK Water – The moment of truth beckons


altIn recent days, the major quoted water companies – Northumbrian, Pennon (South West), Severn Trent and United Utilities (North West) – have announced their full-year results for 2008/09.

Whilst there were few surprises, there were concerns on several fronts. The recession has reduced metered consumption by industry, a factor that adversely affected Severn Trent in particular. Moreover, higher energy and pension costs have also reduced the sector’s profits.

The reality, though, is that - like Banquo’s ghost - these results were overshadowed by Ofwat’s forthcoming five-year regulatory review.

On 23rd July, Ofwat will make its eagerly awaited announcement about the financial projections for the water sector during the 2010/15 five-year period.

Central to Ofwat’s calculations will be the projected capital expenditure total, which is likely to be close to £20 billion – an increase on the current five-year investment cost.

For investors, the most critical figure will be Ofwat’s assumed range for the Weighted Average Cost of Capital (WACC), which is key to determining financial returns.

In the 2005/10 period, Ofwat assumed a 5.1% post-tax WACC, which was widely regarded as generous; it has been a central pillar in sustaining water sector valuations subsequently.

Previously, Ofwat had promised a ‘far lower’ WACC this time round. However, the credit crisis and a fundamental re-alignment of bond yields - notwithstanding massive UK gilt issuance plans - have made the task of setting a five-year WACC very challenging.

Arcane though the arithmetic may seem, water consumers are directly affected by Ofwat’s forthcoming decisions – they will set water charges for the next five years. With the exception of 2000/01, domestic water charges have risen almost inexorably since privatization in 1989.

Hence, there are many interested parties waiting on Ofwat’s 23rd July announcement.

Tax rises to come


People are understandably angry about the MPs' expenses scandal, which has been dominating the headlines for the past few weeks. However, it is arguable that the sums in question are, in the grand scheme of things, pretty minor, and that people's fury would be more rationally directed elsewhere – like, for instance, at the raft of tax rises which have come in this year, or are set to come in between now and 2011. This is where the real theft is going on:

  • The uniform business rate – which constitutes a major burden for many struggling businesses – has just gone up by 2%. It was originally going to rise by 5%, but the chancellor has agreed to let businesses spread the additional 3% over the next two years.
  • Taxes on alcohol and cigarettes went up by 2% in April, while fuel duty is set to rise by 2p per litre in September, and then by 1p per litre above inflation in April 2010.
  • VAT is due to rise from 15% back to 17.5% at the end of the year.
  • From April 2010, people earning between £100,000 and £150,000 will see their personal allowance phased out, effectively creating two narrow income bands (£100,000–106,475 and  £140,000–146,475) where tax is levied at 60%.
  • Also from April 2010, a new 50% tax rate will be charged on incomes over £150,000.
  • In April 2011, the higher rate (40%) tax relief on pension contributions will be abolished, and employee and employer National Insurance Contributions will both rise by 0.5%.

Of course, these are just the tax rises they've been honest enough to tell you about, and given the dire state of the public finances, it could get much, much worse. The government is planning to borrow £175bn this year and £700bn over the next five, to add to the £1.5trn of government debt we already have. The upshot of all this is made clear by the National Institute of Economic & Social Research, who say that without spending reductions, the basic rate of income tax would have to go up by 15% to get government debt below 40% of GDP by 2023.

Socialists highlight "offensive" candidates


An article published recently on Euractiv reports the Party of European Socialists' publication of a list of 12 "conservative, liberal and right wing" candidates who are "at risk of being elected" to the European Parliament.

To quote: "The list contains candidates who, it is claimed, variously deny that the holocaust ever happened, dispute the existence of climate change or hold 'other offensive or absurd' views."

Now, leaving aside the fact that mature adults should be free to vote for whoever they choose in a democratic election, it is undeniable that the vast majority of people would indeed find holocaust denial offensive. But what I find far more disturbing is this easy conflation of holocaust denial with questioning of the received wisdom on the drivers of climate change. It has become the norm now for sceptics to be labelled as climate change deniers, in an attempt to place them outside the pale.

However, on this as so many other issues, it is ironic that the only directly elected institution in the EU is so far out of step with the views of those who it purports to represent. This is one of the reasons why many voters are Eurosceptics. The benefits of a single market, free movement of citizens and an unprecedented era of cooperation between countries who were regularly at war with each other are very real but often taken for granted. More visible, unfortunately, are things such as the CAP, the unaccountable and Byzantine Brussels bureaucracy and the continued progress of a highly precautionary environmentalist agenda which does little for European citizens while stifling innovation and growth.

Martin Livermore is the Director of The Scientific Alliance