Odd what The Guardian doesn't report about East Coast Trains, isn't it?

Or perhaps we might not be all that surprised. Stagecoach has announced its results and the bit that all are interested in is the East Coast Line. They're the private operator who took the line out of the Direct Management Organisation. That's when the government was running it directly and it was making a profit, thus a payment into state coffers.

This of course prompted cries that if a railway could make a profit in state operation, then renationalise them all!

Stagecoach says it has overpaid for East Coast rail contract as profitability plunges

Isn't that great? Well, perhaps not if you're a Stagecoach shareholder but for us taxpayers we've got lots of extra lolly.

Andy McDonald, the shadow transport minister, said the East Coast line – the scene of a dispute between Jeremy Corbyn and Virgin East Coast about overcrowding – showed privatised rail was “dysfunctional, broken and needed to be brought to an end”. The RMT union said re-privatising the line had been a “gamble doomed to failure”.

The normal sorts of comments from the normal sorts of people. But this is odd from The G:

The dispute raises the possibility that Stagecoach could end up paying something closer to the £235m that state-owned Directly Operated Railways (DOR) did in the final year of a franchise it took on in 2009, when the government seized control from National Express.

Erm, what? From the Stagecoach accounts:

As a result, Virgin Trains East Coast has amongst the highest customer satisfaction of any franchised rail operator. At the same time, Virgin Trains East Coast has continued to meet its contractual and financial obligations, including delivering around £525m to 29 April 2017 in premium payments to the taxpayer. This is around 30% more than the average monthly payments made by Directly Operated Railways when it ran the East Coast route. 

Privatisation means that we, we taxpayers, get more money from the line than when government ran it directly? Isn't that proof that privatisation of the railways works?

And might not The Guardian tell us so? For that's the one thing they manage not to mention, that the profit from the line for all of us is higher under this arrangement. Isn't that odd.

A teeny tiny bit of self-promotion

When I agreed to write this blog at the start of the week it was intended to be on the importance of detailed scrutiny of the Government during the Brexit negotiations - with a focus on a small but important issue at the UK-Irish border.

But today didn't go quite go to plan...

Instead of guiding the news to Adam Smith objectives I ended up becoming the story after making a light-hearted joke on Channel 4 last night.

So instead of a post on the intricacies of Border Inspection Posts you get a whole load of self-promotion!

The house was successfully divided. Good amounts of abuse and praise came my way on Twitter and then the papers caught it. The Telegraph picked it up straight away, Guido covered it, with other news pieces in The Sun, the Daily Mail, the HuffPo and the Evening Standard.

I'm now off for a weekend away - so all my love and a promise of a more detailed and relevant blog-post next time will have to do!

Matt

There's no outrage like a faux outrage

"Facebook rules do not protect black children from hate crime" reports The Times today.

A rather striking headline I'm sure you'll agree, but if you bother to read the article you'll see Facebook's rules do nothing of the sort.

From the article:

"ProPublica, a US journalism website, shed further light yesterday on Facebook’s criteria for removing posts by revealing some of the slides used when training censors.

One slide shows three groups: female drivers, black children and white men and asks: “Which group is protected from hate speech?”

The correct answer, according to Facebook, is white men. That is because both race and gender are protected categories, while age and driving status are not."

This is of course an entirely sensible policy. It's not, as the headline suggests, carte blanche for bigots to spew abuse at black children and female drivers. The question is merely designed to work out if Facebook's moderators understand what is and what isn't a protected group.

If a racist were to post verbal abuse that explicitly singled out black children, then the post would almost certainly fall foul of Facebook's rules by attacking a group on a protected charecteristic - race. The same would be true of a sexist sending nasty abuse to female drivers, it'd be covered by the protected charecteristic - gender.

It isn't the first time The Times has gone after a tech company on spurious grounds. In the past I've noted how they attacked Airbnb over supposedly secretive lobbying tactics. Of course, Airbnb were doing nothing of the sort. They simply invited some Airbnb hosts to dinner in Notting Hill and canvassed their opinions about the services. It's hardly cash for questions.

The Times is usually an excellent paper. I read it cover to cover every day, especially enjoying columnists such as Matthew Parris, Viscount Ridley and Rachel Sylvester. But it’s also becoming worryingly anti-tech in its journalism.

Architect of prosperity

As President Xi visits Hong Kong on the 20th anniversary of the 1997 handover from the UK, he might do well to reflect on the name of Sir John Cowperthwaite and what this quiet British civil servant did to make the former colony so prosperous. Which was largely leave the people to their own devices.

After the turmoil of the second world war, Hong Kong was called ‘the barren island’. It had few natural resources, its trade and infrastructure had been ruined, its income was a third of Britain’s. Now it is a world trading hub, its airport handling 60m passengers a year, its skyline soaring ever higher, its goods going all over the world, its per capita income now 40% more than Britain’s.

Part of the reason for that is that the small cadre of civil servants, like Sir John, whose job it was to run Hong Kong, fixed on the objective of making it economically prosperous, and knew that the best way to do that was to do exactly the opposite of what the home country was doing—with its nationalisations, controls, economic planning, high taxes, trade barriers, deficit spending, and all the rest. The Hong Kong administrators by contrast rejected the idea of government planning and spending to invest, believing that entrepreneurs knew how and where to invest, and how to manage their businesses, better than any government officials. They kept the government’s books balanced for nearly every year; they resisted high taxes, believing that low taxes would encourage private investment and would expand the long-term tax base.

Cowperthwaite was the most important person behind these policies, as a new book by Neil Monnery, Architect of Prosperity, demonstrates. He ran the trade and industry department after the war then became financial secretary in Hong Kong—effectively the colony’s Chancellor—until he retired in 1971. 

One thing the book demonstrates is just how hard it is for any government body to prevent itself from interfering in an economy—with the inevitably counterproductive results. Sir John, it shows, fought off many such attempts. There is a story that the British government, then pursuing a full interventionist policy, sent a group of civil servants over to Hong Kong to ask Sir John why he was not keeping unemployment statistics, and to make him do just that. Sir John, goes the story, put them on the next plane back home, explaining that entrepreneurs know the precise state of the labour market from day to day, never mind quarter to quarter, and that if he kept unemployment statistics, people would want him to produce some counterproductive intervention to boost unemployment.

The story is not true, but it is not far from the truth. Cowperthwaite had to fight over and over to resist ‘enlightened’ interference with the Hong Kong people’s lives and businesses, and to maintain his doughty view that economic statistics were a double-edged sword and you should only collect the ones that are really essential.

It’s a fascinating story of a remarkable but quiet man, and the astonishing economic results of his benign policy. Perhaps it is a lesson not just for President Xi, but for us in the UK too, as we drift on doing so many of the wrong things that have made us 40% poorer than Hong Kong.

The book is available on Amazon here.

Perhaps we should admit it outright, we're just unpatriotic

According to Polly Toynbee we're unpatriotic:

Patriotism – pride in the country – is undermined by every failure in the public realm. Since 2010, this government and its coalition predecessor have followed an ideology of cuts, intent on reducing the state to a pitiful 36% of GDP, far below any equivalent EU country. Leadsom, hear this: shrinking the state is the opposite of patriotism – a betrayal of country and people.

The EU country which is perhaps most equivalent to us - we share language, the Common Law and an awful lot of often fractious history - is Ireland which has a smaller state than we do and is also about as rich (no, ignore GDP here, we must use GNP). Of the OECD countries Switzerland is richer, also has a smaller state. That's probably because of he postcode lottery that Polly so bitterly decries. The central state at Berne deals with the peace, easy taxes and tolerable justice bit, everything else is done by the cantons in myriad different manners.

So it's at least not obvious that shrinking the state is such a bad idea.

But then the idea that patriotism is defined by the size of the state in the first place is trivially stupid, isn't it? We're entirely fine with the idea that how well the place is governed can be related to how patriotic we all are, but the idea that the amount of money defines it is ludicrous.

But then, you know, Polly. She always has insisted that it's not how we spend the money that matters, it's feel the width, see how much we are.

 

Basic Income 101

The July 2017 edition of Reason magazine contains a fascinating article by Jesse Walker that provides a comprehensive history of Basic Income: from the concept’s murky beginnings in 1795 to contemporary experiments in unconditional transfers and similar initiatives by governments and NGOs around the world. The ASI has championed the (virtually identical) idea of a Negative Income Tax since the 1970s, and the number of supportive voices for such schemes has grown significantly in recent years.

European countries such as Finland and the Netherlands are in the early stages of basic income experiments, but the most dramatic tests of the concept are being conducted in the context of poverty alleviation in the developing world. In the piece, Walker raises the example of GiveDirectly:

“Having moved from conditional to conditionless cash payments, GiveDirectly's directors started thinking about taking another step and experimenting with a full-fledged basic income—not just payments to a village's neediest families, but a long-term income for everyone in town, one set high enough for people to live on it. Other aid groups had already conducted experiments along these lines in India and Namibia; the results appeared to be favorable, but these studies were too short-term to draw firm conclusions from them, and the Namibian experiment had the additional problem of not being randomized.”

Walker also highlights that despite reasonable dissent (and inevitable ‘anything but the outgroup’ opposition) from across the ideological spectrum, there are currently a wide range of political positions that include elements of support for basic income — something that has been the case for several decades:

“As in the 1960s, the interest is coming from many different directions. Center-left wonks perceive the basic income as a more market-friendly approach to welfare policy. Radicals hail it as an alternative to the "neoliberalism" they associate with those same wonks, imagining a day when work is detached from income and we live in a world of postscarcity abundance. Silicon Valley figures hope it will help us survive the upheaval to be unleashed when artificial intelligence wreaks havoc on labor markets. Libertarians see it as a way to simplify the welfare maze into a cheaper and less intrusive single program.”

If you’re looking for an engaging, accessible, and detailed introduction to the basic income “movement,” look no further than Walker’s essay.

Is austerity over?

Everyone is excited about the prospect of austerity ending. It’s understandable. The effects have been gruesome for lots of people and the politics of it are becoming quite difficult. In many respects it is a victim of its own success. It's only because we had austerity, cutting the deficit from 10% of GDP to 3% or so, that we can talk about ending it now. But it's quite likely premature:

  1. The deficit is 2.5-3%, depending on what measure you use. Most of that is current expenditure, rather than investment. During the early years of austerity, lots of people said that the time to cut spending was when the country was growing – fix the roof while the sun is shining. Well, the sun is (sort of) shining now and they're against cutting spending now too. If something happens in the next few years – Brexit goes wrong, China has a downturn, the Eurozone collapses – we'll be in an even worse position than we were before 2008 and we'll have even more difficult cuts to implement. The low-hanging fruit have been picked!
  2. Even though the deficit is fairly low now (compared to where we were in 2010, anyway), the debt-to-GDP ratio is 90%. Debt must be repaid, so borrowing is just deferred taxation, and is invisible to most voters. The danger is that people vote for spending rises that do not have commensurate tax rises now, and so vote for more spending/tax than they would if they felt the tax cost of the spending as well as the benefits. The higher taxes eventually needed to pay off the debt will be economically costly.
  3. Raising taxes now to eliminate the deficit is legitimate and better than borrowing, but if you raise taxes that affect growth (eg, on investment) you may end up making us poorer – maybe much poorer, if the taxes are on investment – in the medium- and long-run. 
  4. Government borrowing—outside of a period of mass unemployment—can only come out of activity elsewhere in the market. Empirical work bears this out too. You can’t employ people to build schools and also to build factories. Maybe Keynesians are right that this isn’t an issue when interest rates hit zero, but rates on gilts—not to mention every other market asset—have shown no sign of doing so.
  5. The Tories are exaggerating the extent of the changes for PR reasons. They want to look like they're "learning from the result". But spending plans already had deficit only being closed in 2025 – back in 2010 it was supposed to be 2015, a date which was then pushed back repeatedly. The public sector pay freeze (which only allowed 1% pay rises per annum, effectively a real terms cut) was brought in in 2013 – it is not synonymous with ‘austerity’ and as long as things like the welfare cap remain in place it’s not at all accurate to say that austerity has ended.
  6. Getting rid of the public sector pay cap might make sense for other reasons. When it was introduced, public sector pay was quite high compared to private sector equivalents. That’s changed, and (eg) recruiting nurses is becoming difficult. Just as any private firm should, when you can’t hire the workers you need, you need to offer higher wages.
  7. The welfare cuts were balanced out by lots of folks getting jobs. Unemployment at 4.7% takes a lot of the sting out of welfare cuts (though the worst are yet to hit). Food banks are mostly used by people who haven't received their welfare (or wages) on time – that is, it’s a function of a badly run welfare system, not necessarily one that is giving out too little money. (Maybe it’s badly run because the system is underfunded.) The welfare cap of £20,000 per household (£23,000 for London) affects about 88,000 families, mostly large families and families with high housing benefit bills. Politics aside, this is probably going to hurt people more severely with less fiscal benefit than the public sector pay freeze – but this was the cap that both the Tories and Labour (according to its manifesto) are apparently in favour of keeping.
  8. The cut in investment under austerity was bad, because projects with positive benefit-to-cost ratios that the private sector can’t carry out should go ahead as long as the government can borrow reasonably easily. If politics makes this impossible, the government should be trying to unlock some of the £2.5 trillion in pension funds for investment in infrastructure – it's more important to fix the rules than to borrow even more. But borrowing to fund current spending is the real problem, and it would probably be better if we only spoke in terms of that, and kept capital expenditure conceptually separate.
  9. Austerity probably didn't hurt the recovery – the UK had fastest growth in G7 between 2010 and 2015, while implementing harshest or second harshest spending cuts (US was arguably harsher and also had strong growth). Since we have an inflation targeting central bank, the reduction in spending and hence the macroeconomic impact of the cuts was mostly offset by easier monetary policy.
  10. If austerity really is politically impossible (ie, if they stick with it then Corbyn gets in), then the impetus for pro-growth policies is very high, because eliminating the deficit by means of growth now becomes the name of the game. For that, it’s all about housing, tax reform and infrastructure.

Is Amazon's takeover of Whole Foods anti-competitive? Probably not.

A few days ago, Amazon announced its plans to purchase the predominantly USA-based grocery retail chain Whole Foods for almost $14bn. Although both companies operate in many countries, the main competition issues (if any) are likely to arise in the US, were both companies have a non-negligible presence.

Indeed, this announcement has resulted in a number of people claiming that the proposed merger will be anti-competitive. Specifically, there are some claims that the merger would result in 1) bundling and foreclosure of rivals; and/or 2) predatory pricing. In short, the first theory of harm posits that Amazon would force customers that wanted to purchase its distribution (or other) services to also purchase from Whole Foods (or vice versa), while the second theory of harm suggests that the merged entity would price below cost in order to drive out rival grocery firms before increasing prices once those rivals exited.

Importantly, both of these theories of harm require that the merged entity have some form of "market power" (i.e. the ability to charge a price above the competitive level and to act independently of its rivals). Typically, this is most likely to occur when a firm has a share of sales in a particular market of over 40%. However, as a general point, these theories of harm gloss over the fact that Amazon and Whole Foods' shares in grocery sales are tiny - less than 5% combined in the US. As such, it is difficult to see how the combined entity can have any market power.  Clearly, the merged entity would not satisfy this for sales of groceries at the moment of the merger.

Bundling

However, others might argue that Amazon does have a sufficiently high share of sales of "online retail" to be classed as dominant. As such, they argue that Amazon could "leverage" its power in that area to grocery retail by bundling some of its services with those of its groceries. However, as the merged entity will be active at the retail level of groceries, it is not obvious exactly what other services offered by Amazon could be bundled with them - for the bundling strategy to work, consumers would still have to want at least one of the items in the bundle, and could continue to purchase them separately from Amazon or elsewhere anyway. Hence, there does not appear to be a viable mechanism through which this bundling theory of harm could occur.

Predatory Pricing

Moreover, for the predatory pricing theory of harm to be valid, there must be strong evidence that 1) the merged entity would price its groceries below some measure of cost that represents the extra cost that would be incurred by supplying one extra unit of output (usually measured as average variable cost of long-run average incremental cost); and 2) it would have an incentive to do so.

The first condition is notoriously difficult to prove - one first has to decide which costs should be included / excluded in the measure (which really isn't as easy as one would think - e.g. should advertising spend that applies to brand-related marketing, but isn't specifically related to groceries, be included), as well as deciding the relevant time-frame over which costs are assessed.

The second condition requires proving that the merged entity would become dominant (and therefore be able to recoup the losses it had made in pricing below cost) in the future. This is where the theory of harm becomes incredibly speculative - it assumes that sufficient sales would switch to the merged entity from rival grocery firms that the merged entity would be dominant. In other words, it assumes that pricing below cost would be sufficient in and of itself to persuade consumers to switch (regardless of e.g. quality of service provided) and that rival grocery firms would not respond in any way to the merged entity's actions. Clearly both of these assumptions are likely to be violated in practice and, as such, the predatory pricing theory of harm seems unlikely.

Summary

Given that the merged entity is unlikely to have the incentive or ability either to bundle its products together or recoup any losses made from pricing below costs, both of the theories of harm currently being bandied about are unlikely to be valid. As such, it is difficult to see how the cries that the proposed merger is anti-competitive are anything more than "a big firm is buying someone so they have to be stopped". That should not be a basis on which a merger can be prevented.

 

Government can't even give away free money

One for the Annals of Government Failure:

A damning report into a disastrous £178 million Scottish government IT project that has left farmers without vital grants has uncovered a series of errors which will now have to be fixed at even greater cost to the taxpayer.

One of us has direct business experience of building IT systems. This is not good news:

One of the main problems has been a lack of documentation showing how the system was put together.

The report said: “The level of documentation is poor and is a critical risk to future stability. In many cases design documents don’t exist, in many others the design document does not match what has been built”

In one passage on corners being cut, the experts said: “It is evident that quality has been compromised in many areas (including architecture, design, analysis, coding, testing, governance, quality assurance of design, coding and implementation) to expedite delivery.”

What has been built isn't what was planned and no one does know what has been built because there is no documentation. There're just bits of code which interact but, unfortunately, don't work. No one knows why either.

But this is worse than just yet another government IT system which doesn't work. There are only 18,500 Scottish farmers getting subsidies in the first place. The IT system cost here is thus near £10,000 per farmer. And note, that's the cost just of the system to work out who to give the free money to.

OK, it's not really free money as we've all paid the taxes to the EU which then comes back as farm subsidies. But viewed in isolation it is.

It's not even that the system is complicated. Most of it is area payments, we know the size of the farms. If one clerk processed one farmer per day then a hand wavey estimate of the running cost of the system, purely on paper, would be £4 million a year.

This is an excellent example of why we want to have minimal government. Simply because government's not a good way of doing things. Really, we ask you, spending the thick end of £200 million to fail to give free money to under 20,000 people. This isn't a system we want to use for very much, is it?

The EU's got it all wrong on Google

By fining Google £2.1bn for giving special prominence to Google Shopping in shopping-related searches, European regulators have made exactly the same mistake that they and US regulators did when they fined Microsoft for bundling its Internet Explorer with Windows in the 1990s (a decision that even Lawrence Lessig, who led the first case, now says was wrong).

The basic error is to assume that Google or Microsoft’s dominant position in the market is unchallengeable – that they are akin to ‘natural monopolies’ like, say, water or electricity companies, and can use their position to exploit consumers – and that instead of competition between platforms being able to take place, they must brute-force competition within those platforms. But Microsoft’s market dominance was much more vulnerable than it seemed, and normal pressures of competition and innovation were what did for Windows in the end, no regulators needed. Windows is now only the operating system for 14% of devices shipped, and Android is the most-used operating system for browsing the internet.

An analogy is mobile phones: if you assume people are locked into using some kind of Android phone, then the preeminence that Google gives to its own products looks like a big problem. But when you realise that there are alternatives to Android, like iPhones, competition within the platform begins to look less important than competition across platforms. 

And forcing within-platform competition might make the product worse – look at how vertically integrated iPhones are, which allows things like frequent software updates (something Android badly lacks), and how Google products (like the Pixel) have been moving towards that sort of model too. It also deprives the company of a revenue stream that makes investment in the free product, like search or Android, possible.

Finally, bundling or integrating price comparison tools might be good for users who are less tech-savvy and would normally go for a 'trusted' but more expensive retailer. If you don't realise that SkyScanner exists and would normally just go with BA every time, it could be very useful to get Google Flights right up top, showing that Ryanair does what you're looking for much more cheaply.

So it’s not even clear that prioritising Google Shopping results is bad for consumers – it may lead them to be more price-conscious and to shop around between merchants more. Even if it is – because it’s worse than some alternative price comparison site, for example – there is still no case for punishing Google for giving it special prominence. If Google Shopping is worse for consumers then it must be acting as a revenue raiser for Google, and a de facto way of charging for use of Google search (and other free Google products). 

If people can switch between platforms it doesn’t matter that much if, within a platform, there isn’t that much competition. Prioritising a particular shopping search engine is not akin to gouging water users with higher prices because there are alternatives to Google that users can switch to easily. If the overall user experience is made worse by Google Shopping being prioritised, then users will have the option of moving to a search engine like Bing which is perhaps less good as at search but better overall because it does not prioritise a bad shopping tool. Indeed Bing has specifically targeted Google Shopping, which they say is worse than their own tool, to get users to switch. And there is an incentive created for entrepreneurs and large existing rivals of Google like Facebook to create their own, rival platform.

Along with this broad point there are some specifics about this case that make it even weaker. It doesn’t take account of how people do online shopping: as well as search engines they also use things like Amazon and eBay, and they get advice about things from social sites like Facebook and Instagram. And bundling clearly doesn’t work that well for Google if the product isn’t that good – Google Flights gets special prominence if you search for flight information, and rivals like SkyScanner and Kayak are doing fine.

But the core issue here is whether we need to force competition within software platforms if competition exists between them. Just as Windows users moved to other operating systems (both on mobile with Android and iOS and desktop with Linux and Apple’s OS X), Google users have plenty of alternatives they can switch to if they think that Google’s bundling worsens the platform’s quality enough. Bundling has benefits as well as costs, because it pays for the free things Google does and allows for more streamlined use of software. Trying to stamp it out will end up hurting users in a misguided quest to help them.