On that £50 billion EU bill for Peter Mandelson's pension

Michel Barnier, the Frenchman negotiating for the EU over Brexit, has told us that Britain will be faced with an exit bill of £50 billion upon leaving the European Union:

Britain will be presented with a £50 billion “exit bill” by the European Union as soon as Theresa May triggers Article 50, the chief negotiator for Brussels is warning.

Michel Barnier has told colleagues that the UK must keep paying “tens of billions” annually into the EU budget until 2020.

The bill would include the UK’s share of outstanding pensions liabilities, loan guarantees and spending on UK-based projects.

Some of this is not sensibly to be included - loan guarantees are payable when loans fail for example, not before. It's also a terribly interesting accounting - this is what the EU already costs us, without the actual running costs of it on an annual basis. The accruals of amounts already owed that is, without the further payments that would be made if we stayed in. 

Which puts that £350 million a week claim in an interesting light, doesn't it? 

However, the general concept seems sound enough. When you give up a lease on a flat you do indeed pay the last bit of the electricity bill, the gas and so on. We might think that we can manage, perhaps even decide upon, Peter Mandelson's pension ourselves (and that is very definitely included in this sum) but let's not allow personal taste to intrude upon such matters.

However, when you do leave such a lease you also get paid out on any improvements you have made to the capital value of the property. And over our decades of membership a number of improvements have been made. There's a substantial landed estate for example, various parliament buildings dotted around, agencies in many major European cities, embassies in most major world capitals. All of these are owned by the EU and have been paid for from the various payments into it by the national governments.

Britain has also been one of the very few such national governments consistently making net payments into the system too. We thus have an argument that a substantial portion of that capital estate is ours and needs to be returned to us.

And it will really be very interesting indeed to find out whether the tail end of the running costs, which is what is being demanded, is larger than the capital value of the estate we've already paid for. For if it is then that's a statement that the EU is simply a drain on us as we pay for it. Only if that capital value is larger than the running costs can we say that the system is a net wealth builder - which might be useful in portraying the EU as worthwhile but it would then mean that we would be net recipients of funds upon leaving.

How should we pay for social care?

Council tax bills may rise to fund care for the elderly, Sky News reports, as the hole to pay for it grows. It’s a very difficult problem to solve: if the state could credibly commit to letting people sink or swim based on whether they’d saved for themselves, there would be a strong incentive for people to save for themselves, but since it’s inconceivable that we’d actually let old people go without care there’s a strong element of moral hazard at play.

Council tax rises wouldn’t be the worst way of raising tax, because they hit landowners who are probably older on average, rather than renters. That might seem counterintuitive, because it’s whoever is actually living in a property that actually hands over the money for council tax, but the economic theory and empirical evidence is pretty clear: when council tax bills rise, rents generally fall in proportion to that, so in actual fact it’s the property owner who pays. I explain why here.

Still, since council tax is a tax on the property value rather than the land value it disincentivises investment in properties (building denser or higher quality units, for example), and it’s also a straightforward expropriation of landowners which is less than ideal.

Median income by age: 2007–08 to 2015–16 (2007–08 = 100) (IFS)

Median income by age: 2007–08 to 2015–16 (2007–08 = 100) (IFS)

If the state is going to shoulder a large part of the social care burden it makes sense that other benefits to the elderly should be cut to help pay for it. The triple lock, in particular, forces us to divert funds to people who in many respects are quite well off – over-60s have actually seen their incomes rise since 2007, unlike every other age group, as the graph above shows. And with inflation at just over 1 percent, the triple lock requires at least a 1 percent real terms increase, when all other areas of government spending are being cut. It doesn’t make much sense apart from as a vote-buyer, and it’s expensive.

If it’s cost-effective to means test things like free bus passes and the winter fuel allowance, that might be another way to make sure we’re not wasting money on wealthier pensioners, but all means testing that looks at assets (like the size of your pension pot or the value of your home) is a harmful disincentive to saving, which makes us all poorer.

This goes to the root of the problem with paying for social care. The simple approach would be to make it so that those who can pay do, but because pensioners are living off assets what this really means is that means testing will give people a reason not to save or invest their income for their retirement. One often-mentioned ‘solution’ would see pensioners who own their homes or have other savings required to mortgage or sell them to pay for their care, with those who don’t covered by the state. But this gives people a big reason to consume their income instead of investing it before they retire, which is bad overall (investment drives growth) and pretty unfair on the poor sods who aren’t wise enough to game the system this way.

It might be that reducing barriers to saving would reduce this problem – cutting capital taxes and giving people unlimited ISAs so returns to investment are taxed as little as possible.

But I suspect a social care savings account scheme might also be needed, like Singapore’s health savings account policy. If we required people to save for their old age care now, topping up the contributions of people on low incomes, we could make sure that as people get older they have a pot of savings dedicated to their social care. It’s their money – if they don’t need social care and they have money left over when they die, it goes to their children (tax-free, of course). As with Singapore’s health system, we’d probably need an insurance system as well, to cover the costs of those whose needs are exceptionally high – that, or accept that there will always be a pretty large role for government paying for people in their old age. I’m not sure anyone in government has the appetite for reforms of this scale, but I can’t see any other long-term solution to social care funding that would work.

Talk about getting the wrong end of the stick here

The Times has a piece from Alice Thomson which manages to get matters entirely the wrong way around:

Surrogacy rules treat babies like objects

No, not really, that's the one thing that the surrogacy rules don't do:

The 30-year-old Surrogacy Arrangements Act, and the system of parental orders under the Human Fertilisation and Embryology Act, is a bizarre anomaly. Even Mary Warnock, the author of the 1984 Warnock Report which formed the basis of the legislation, now says the law is wrong.

The legal parents of a child at birth are the surrogate and her spouse rather than the biological parents. The baby is viewed as an object to be kept or given away rather than as the most important consideration.

Again, no, the very problem is that the baby is not treated as an object. For we can make contracts about objects in a manner that we cannot about human beings. The sale of one human from one to another is also called slavery and we're really pretty sure that we don't in fact like that sort of objectification of a human. This is why we don't, do not and probably cannot, have binding contracts upon surrogate parents.

Simply because if we are to do so then we've got to declare that the child is indeed an object which can be subject to such contracts, an object that we can force someone to deliver up.

We are vocally in favour of organ and gamete donation being sullied by filthy lucre. As we are of paid surrogacy contracts. We're deeply, deeply, unsure whether such surrogacy contracts will ever be thought to be truly, in extremis, binding, rather than a looser laying out of general expectations about what is to happen. 

But we are entirely certain here that this particular problem is that the baby is not an object and thus cannot be subject to contractual, err, terms of delivery.

Postcode auctions, not postcode lotteries

There’s a lot of talk about postcode lotteries, but we don’t have lotteries, we have postcode auctions.

This is because when services or amenities are tied to a location we end up paying for them through higher house prices. This is very clear with schools: many state schools are just as good as fee-paying independent schools, so being able to send your child to one is like having a free ticket to a private education. Parents who can afford it will pay a bit more for a house that’s within the catchment area of one of those good state schools, ultimately driving up the price to be close to the expected value of sending their child to that school. This effect is called 'capitalisation' and, right enough, when we look at the empirical evidence it’s fairly clear that house prices rise, at least to a large extent, to reflect the value of schooling in an area, especially in areas with very good schools.

This seems to hold when we look at Local Authority grants in general. This study looked at grants given to marginal Labour councils during the 2000s by central government – a proxy for money used by the central government to buy off voters in swing constituencies. (Naughty.)

What it found was that, where the supply of housing was constrained, house prices rose almost fully to reflect the value of the grant. That’s a sign that the grants benefit landowners in these places in a fairly direct cash transfer to them, from people elsewhere. As the quality of the area rises, so does the price of their homes.

The same effect exists when we raise or cut property taxes like business rates or council tax in an area – property values and rents fall or rise in proportion to the rise or fall in the tax, meaning that it’s landowners who benefit rather than the renting business or resident. This seems to capitalise into property values very quickly.

Why does this matter? On the one hand, it’s not necessarily a bad thing for people to pay more for things like attractive neighbourhoods. The problem is that, when the money for this is coming from taxpayers from outside these areas, it’s a transfer from them to landowners in those areas. There’s no reason to think that this should be a welfare enhancing transfer, and if it forces renters to move by raising rents then it might well be welfare reducing.

Another problem is equity: most people value good schooling for their kids and living in low crime areas very highly, but can’t afford to pay. If better-than-average state schools are only accessible to parents who can pay through higher house prices, lots of the public expense is benefiting people who can pay, and are.

The final problem is over-entanglement. For example, if quiet and leafy parts of town also happen to be the ones with good schools, you’ll have a situation where some people who really like quiet neighbourhoods but don’t have children are wasting money by having to pay for access to good schools, too, or are being priced out needlessly, and vice-versa for parents who just want the best schools for their children.

There’s no straightforward answer to this, because some of it is unavoidable, and some of it is exactly what we want – house prices should be higher in more desirable areas so they go to people who value them most.

But attaching services to these locations is probably a bad idea because it concentrates them on people who can afford it. A school voucher-like system without catchment areas, and patient choice where people can go anywhere they want to access healthcare if a practice or hospital can admit them, could help to diminish the concentration of good services on people who can pay for it, and might drive up standards overall.

In terms of equity, doing this where possible might make the system more like a lottery (and so more open to poorer people than our auction-like system is now).

Remember that one of the main points of the education and healthcare systems is to cover people who would not be able to afford them otherwise. If lots of this is actually being captured by wealthier people and the taxes used to pay create additional deadweight costs, it might not be a highly efficient system. And it may be a good reason to prefer giving cash transfers to the poor and let people pay for services directly, so that we can better target the people we really want to help.

Put an end to this Brexit bickering

Having voted to leave the European Union in a referendum, Britain is now expected to initiate that process by triggering Article 50 of the Treaty of Lisbon. This was designed to reduce uncertainty in the event of an EU Member State wanting to leave, by providing for a two-year negotiation period.

In fact, it will have the opposite effect. In any political negotiations, both sides tend to adopt extreme positions in order to get the other to make concessions. Only just before the clock strikes twelve does agreement break out – if indeed it does. Such a game of chicken hardly encourages investors, as we discovered during the trade unions v government disputes of the 1960s and 1970s. Article 50 is a recipe for two years of uncertainty – or maybe three or four, knowing how these things are often eked out.

And what will we achieve from all this stress? Probably, two-thirds of diddly squat, which is what David Cameron got from his great ‘Renegotiation’ back in the Spring. The reason is that, if the EU concedes anything to us, it will face demands from other nations, both in the EU and outside, for a bit of the same. Give us a special deal, and everyone will want one.

A third problem is that it is not the leaders of the 27 other nations who will lead the discussions, but the eurocrats in Brussels. How else could it be? You cannot have 28 people round a negotiating table and expect agreement. But, as we have seen, the folk in Brussels are the most intransigent negotiators. They are invested in The Project, and the UK has put two fingers up in their face. Again, concede to us and The Project of ever closer union disintegrates, along with their own purpose, jobs and pensions. (Well, not pensions, of course.)

German carmakers and French food and pharma companies and everyone else who benefits from the UK’s £60-£90 billion trade deficit with the EU might be keen to keep tariff-free trading links open with the UK, fully aware that the UK, as the world’s fifth largest economy, would be good to keep sweet. But those who are actually leading the negotiations have a different, more political, agenda.

So two or more years of Article 50 negotiation will be worse than a waste of time. It will simply generate bitterness between the UK and the rest of the EU, and stir up uncertainty among investors on both sides of the English Channel. So what is to be done?

We could, of course, take the off-the-peg EEA solution, the ‘Norway model’. But that still means paying in to the EU budget and a large measure of free movement of workers, which were firmly rejected in the Referendum. And as Prime Minister Theresa May tells us, “Brexit means Brexit”. But her Great Repeal Bill idea of taking all EU law into UK law – where we can amend or scrap it as we like, on or own timetable, makes perfect sense.

Given that Article 50 will take us nowhere, however, the best thing is simply to invoke it and leave. Goodbye to the single market and the customs union, we will be governed by the WTO rules that actually govern our trade with the other 80% of the world. Since the rest of the world is 60% of our trade and rising (and the EU is 40% and falling), what’s the loss? Would our financial services be ruined because of the loss of passporting? Hardly, we were No1 before passporting, and our biggest single services customer is America, where we don’t have passporting. And in any case, we do not have a single market in services. It’s one of our biggest irritations, but it’s never going to change.

And the true meaning of ‘customs union’ is ‘protectionist club’. The average tariff is only 2.4% – so it is no big deal either way. But the EU raises large tariffs against certain products, especially food products, to protect its own farmers. Outside the customs union, we could buy food from the whole world, much cheaper. Our old Commonwealth partners would be delighted to sell it to us. That is good for us, and good for the poorest in many developing countries in particular. Not only the UK, and UK business, would benefit from us simply leaving, and making an offer to all the world to trade with zero tariffs. Some of the world’s poorest would too. But also, we would end all this Brexit bickering and be able to get on with real life.

Why not tax dead people - they are dead, after all?

Supporters of inheritance taxes do love to argue that we really should tax dead people. After all, they are dead so aren't going to squeal about it. Such taxation does therefore at least pass one test, the maximisation of feathers plucked with the least hissing.

However, this idea does meet one major obstacle, which is that the major economic unit among humans is not the individual but the family:

Ageing parents are drawing up legal documents to make clear that they would rather die than allow excessive care home fees to eat into their child’s inheritance.

The rising cost of elderly care is leading the middle-aged to create powers of attorney enshrining their desire to refuse treatment should they become incapacitated, a leading law firm said.

True, that is a piece of puffery from a law firm advertising, through he kind editors at The Times, their ability to write such legal documents. But even puffery has a basis in truth - why bother to advertise what no one is interested in? 

Which brings us to that family thing. Marriage, or at least pair bonding, are essential to the continuation of the species. We don't do that because sex is fun - it's because those for whom sex was fun bonded and thus raised more children through those decades human children need. There are indeed other species which take longer to reach sexual maturity than we do. But none that require such parenting for so long.

All of which has made the family that basic economic unit of us humans. At which point the detestation of inheritance tax makes sense. The aim and purpose of our travails in the vale of tears is the production of grandchildren. Passing on money rather than J. Corbyn getting to spend it on diversity advisers accords with our deeper instincts. Those rationalisations about how taxing dead people harms no one notwithstanding.

There's a larger point to this. We can build abstract arguments for many things just as sandcastles in the air are entirely possible. But we do have to recall, at least occasionally, that we're dealing with Homo Sapiens here. And he and she can be contrary little buggers at times. We must therefore check that our grand abstractions accord with what humans actually do.

Sure, it would be great if everyone would work flat out to create the perfect society, sharing everything equally as they did so. We've also tried that and it didn't work - because humans. So too with inheritance tax. There are all sorts of logical reasons why it's a stunningly good idea. But that people would seemingly rather pop their c logs rather than not be able to pass on inheritances would seem to indicate that this is one of those times when logic and humans don't mix well. Or perhaps that the wrong logic about humans is being deployed.

Bank of England stress tests inadvertently reveal the weakness of the UK banking system

Bank of England stress tests inadvertently reveal the weakness of the UK banking system

The Bank of England’s latest stress test results are important for the following reason: in acknowledging the financial weakness of RBS, the Bank of England is implicitly acknowledging that its own past policies have failed. After all, had those policies worked, then RBS should have returned to financial health long before now. [1]

The results of the stress tests properly interpreted also show that RBS is not the only bank in trouble. The Bank of England flagged up ‘issues’ with Barclays and Standard Chartered too, but the truth is that all the banks are financially weak. The elephant in the room is that the Bank of England’s policies towards the UK banking system have failed to restore it to financial health despite the vast public subsidies involved and despite Bank of England protestations to the contrary.

Some people still aren't getting these finer distinctions of private property

It's quite obvious that out there in that political world there are people who don't get even the basics of this idea of private property. Those who insist that shareholders cannot pay their managers what they wish for example, or that someone else must be prevented from utilising their own land in their own manner because, you know, the view or something.

But there are also those who miss some of the finer distinctions in this area:

Taxpayers saved the Royal Bank of Scotland. Now it’s time we owned it

Gareth Thomas

That's interesting, not sure we agree, but it is interesting. Maybe the taxpayers should buy out the remaining private shareholders of this dog's dinner. And when put that way we definitely disagree with it. That isn't what is being suggested:

Together as taxpayers we saved the Royal Bank of Scotland – now we should each be allowed to own it. It should become a people’s bank, which every tax-paying British citizen would have the right to become a part-owner of.

Every taxpaying Briton is a part owner right now. For the government, which we fund with out taxes, owns some ungodly percentage of the shares in RBS.

More than £45bn of taxpayer funds have been injected into the Royal Bank of Scotland. This was the right thing to do, but neither keeping it as a state bank nor a fully privatised bank offer the same advantages as turning it into a mutual.

We can have private stock companies, public and even state. RBS is an odd little blend of those last two at present. A mutual is something different, it is owned by (usually at least, in the case of banks or building societies) the depositors. Who gain a slightly better rate of interest on their savings from the absence of that outside capital which would like to get paid a dividend or two.

So the demand here is that all of us taxpayers, who currently own however much it is of the bank, should make a free gift to the future depositors with RBS of £45 billion? Or at least whatever the current diminished value of that investment is?

You know, we really do think that's a deal we can reject. It might even be a good idea that RBS becomes a mutual - again, not that we think so ourselves. But we really are very certain indeed that if that is to happen it should happen with other peoples' money, not ours, us long suffering taxpayers.

We the heck should all of us gift such a thing to some subset of us?

Bank of England fails its stress test again

Bank of England fails its stress test again

On November 30th, the Bank of England released the results of its third publicly disclosed set of stress tests of the financial resilience of the UK banking system.  

The good news is that the news is good: our banking system is in good shape, but the bad news is that the good news is not credible.

In this post, I would like to put the stress test results through my own favourite stress test – a reality check.

By this most basic of tests the Bank scores an ‘F’.

How Britain should fix its fisheries

Over at Brexit Central, Madsen has written about his plan to restore Britain's fisheries using property rights and market mechanisms – the Icelandic model, essentially:

Having seen its fish stocks depleted by over-fishing, Iceland instituted a quota system to restore and sustain them.  Each year its scientists estimate the biomass within Iceland’s waters.  They measure the amount and size of a variety of different species and calculate the quantity of each that can be fished sustainably.  Quotas of different types of fish are assigned to every boat, quotas which belong to the owners and which, crucially, can be traded.
Every catch is recorded, and no dumping is allowed.  All catches must be landed, and if a boat exceeds its quota for a type of fish, its owners must buy quotas from others to stay within the law. All catches and quota trades have to be made public, and are put online so that any vessel can inspect the current state of the market, and decide what and where to catch based on public information.

Read his post here, and his recent paper on these proposals here.