Capping competition

New report by Sam Dumitriu looks at dangers to the Energy market by government intervention, and just what the Government should do to encourage competition.

  • Big 6 energy suppliers should be invited to sell off 10% of their customer base to allow a new entrant to enter the market and boost competition for consumers; this would follow the proposal by Professor Stephen Littlechild in the Telegraph that suppliers should be forced to sell customer bases as National Power and Powergen were as power generators.

  • Price differences between “rip off” Standard Variable Tariffs (SVTs) and cheaper fixed tariffs are not evidence of low levels of competition. In fact, large price differences between similar products are frequently observed in highly competitive markets.

  • International evidence suggests that price caps reduce rates of customer engagement (measured by switching), lead to higher average costs, and result in inefficient pricing arrangements.

  • Reduced customer engagement will reduce the prospects of innovation within the energy market in the medium-to-long term to the detriment of consumers.

  • Price controls would threaten an environment of permissionless innovation where suppliers can offer new pricing models without asking for regulatory approval. Dynamic pricing models could accelerate the roll-out of low-carbon renewables and home batteries, but such models rely on peak-time surge pricing.

  • Relative price caps will also likely lead to reduced customer engagement, lesser competition in the fixed rate market and higher mark-ups on SVTs – with profits flowing to suppliers and not savings to consumers.

  • Evidence from Australia suggests that caps harm competition and lead to worse long-run deals for consumers. In 2012 when Queensland's politics forced a lowering of the price cap just over 45% were on the standing offer, and 40% on medium-level discounts; by 2015 the number accessing discounts had halved with proportion on standard level at the same amount. In contrast, deregulated Victoria saw the proportion on standing offers almost halve over the same period as the proportion accessing high-level discounts increased rapidly.

  • There are a number of alternative measures that would cut costs for vulnerable customers without reducing customer engagement and stifling innovation. These include opt-out collective switches and allowing competitors to target disengaged customers with direct marketing.

Don't have a cow, man: The prospects for lab grown meat

Researcher Jamie Hollywood and Adam Smith Institute President Dr Madsen Pirie discuss the potential for lab grown meat to save lives and the environment. 

Executive Summary:

  • Demand for meat has grown along with incomes. During the 1960s meat consumption in East Asia stood at just 8.7kg per person, thirty year later that figure was 37.7kg – an increase of over 330%. This increased demand has meant huge swathes of land given over to meat production. While 19 people can be fed from just a single hectare of rice, only one can person can be fed per hectare dedicated to cattle.
     
  • Lab grown (or cultured) meat could mean a cut in agricultural greenhouse gas emissions of 78-96% while using 99% less land. 
     
  • While growing meat in a lab has been difficult to master, and costly to engineer, the price has been falling. Just five years ago the cost of a burger made with meat grown in a lab stood at $250,000, but now the price tag has dropped to just £8. 
     
  • Cultured meat has the potential to solve the looming antibiotic resistance crisis. With farming using up to 70% of antibiotics critical to medical use in humans, cases of resistance are on the rise, driven by intensive farming practices.
     
  • Cultured meat will also reduce cases of food poisoning as, unlike on farms, growth takes place under controlled conditions.
     

 

 

Asleep at the wheel: the Prudential Regulation Authority & the Equity Release Sector

Professor of finance and economics at the University of Durham, Kevin Dowd, takes a critical look at the Equity Release Mortgage sector and finds something really quite worrying:

  • There is a scandal brewing in the Equity Release Mortgage sector. This scandal is similar in nature to the Equitable Life scandal of nearly two decades ago – it involves the underestimation of opaque long-term guarantees – but on a larger scale.  
  • The guarantees at the heart of this problem are the No-Negative Equity Guarantees issued by lenders in the Equity Release market. These guarantee that the maximum repayment on Equity Release loans can be no greater than the property price at the time of repayment.  
  • This under-valuation problem is a ticking time bomb that could do serious damage to the financial health of the Equity Release sector. 
  • The regulator, the Prudential Regulation Authority, has made half-hearted efforts to address this under-valuation problem, but has for years failed to rein in firms that used inadequate valuation methods for their No Negative Equity Guarantees.  
  • A recent Treasury Committee investigation into the UK life industry missed these problems and unwisely set up the Equity Release sector as a poster child to be promoted. 
  • This Equity Release guarantee scandal raises far-reaching questions not just about the Equity Release sector, but also about the PRA’s supervision of it. 

Drivers of Safety: The outdated practice of MOT testing

Economist Alex Hoagland puts the MOT to the test. He finds that mandatory vehicle safety inspections have few safety benefits and that motorists could be up to £250m better off each year if they were scrapped.

Executive Summary:

  • The MOT requires drivers of any vehicle older than 3 years to pay between £30 and £80 annually for vehicle safety inspections, generating over £250 million in yearly revenue for more than 20,000 garages throughout Britain. However, this industry has not been rigorously evaluated for over 20 years.
  • The idea of vehicle safety inspections is an outdated one stemming from widespread use of unsafe vehicles in the 1950s. Over the years, reforms have added burdens to drivers rather than removed them due to an unsubstantiated assumption that inspections increase safety. However, this assumption has proven to be inaccurate.
  • As vehicle technology increases, annual safety inspections are rendered more and more useless. While the MOT has remained essentially unchanged for half a century, improvements in vehicle safety technology have spurred a 55% decline in traffic fatalities over the last 10 years.
  • Mechanical failure accounts for merely 2% of all accidents in the United Kingdom, the same rate as other regions that do not require comparable inspections (for example, the greater portion of the United States). A recent 2018 study performed in the United States shows that discontinuing these inspections has no effect on either the rate or severity of accidents due to mechanical failure.
  • Furthermore, over 65% of accidents in the United Kingdom are due to driver-specific behaviours, such as driving with excessive speed, driving under the influence of alcohol, or forgoing the use of a seat belt while travelling—none of which an annual MOT test can prevent. 
  • If the MOT is not abolished, it should at least be overhauled substantially to place emphasis on driver-specific behaviours, rather than vehicle-specific ones. At a minimum, the age of testable cars ought to be increased and the frequency 2 of inspections reduced.

 

 

1 Million Years of Life: How harm reduction in tobacco policy can save lives

Research Economist Daniel Pryor sets out the case for a liberal harm reduction policy in tobacco. He argues that an evidence-based harm reduction approach that expands reduced-risk options for current smokers can save lives while respecting individual choices.

The key findings are:

  • Young female smokers are being left behind in our vaping revolution; if young women vaped at the same rate as young men, over one million years of life could be saved.
     
  • A liberal, evidence-based approach to tobacco harm reduction has been shown to provide enormous gains for public health, both domestically and internationally.
     
  • Sensible reforms to e-cigarette advertising restrictions could help many smokers switch by combating widespread misperceptions about the risks of vaping.
     
  • Repealing counterproductive EU regulations on e-cigarettes and encouraging public bodies to reexamine their indoor vaping bans will also help more smokers make the switch.
     
  • While e-cigarettes are having a significant positive impact on public health, it's important to ensure smokers have a wide choice of reduced-risk products since different smokers have different preferences.
     
  • Creating a new taxation and regulatory category for ‘heat-not-burn’ and similar products will encourage innovation to ensure as many smokers as possible switch to safer alternatives.

Stable Footing: Ensuring a sustainable future for social care

Eamonn Butler and Paul Saper argue that a long-term solution for social care requires older but wealthier people contributing more to their own generation's care costs.

Executive Summary:

The Problems:

  • Although the existence of the future funding crisis in adult social care is widely acknowledged, its scale is greatly underestimated. Factors in supply and trends in demand both fuel this crisis.

  • On the demand side, the demographic trends are understood. But care budgets cover not only the needs of the elderly; they also the needs of younger people with physical and intellectual disabilities, whose numbers are increasing.

  • More women participate in the economy, making it harder for them to care for relatives. Many family carers are themselves elderly and limited in what they can do. And families are more dispersed, with fewer people living near their elderly relatives. Meanwhile, inefficiencies and perverse incentives force more people with social care needs onto the NHS, leading to unsustainable budget pressures.

  • On the supply side, it is difficult to induce people to save for something that only one in four of them will need. And insurers are unwilling to step in because of the ‘long-tail’ risk that some individuals may need many years of expensive care. 
     
  • The system is a lottery and widely perceived as unfair. The old mechanism by which self-pay residents subsidised public provision is, increasingly, no longer working. 
     
  • Care at home often flouts employment and wage legislation, and many of those hired as live-in carers have low skills and few qualifications, risking poor quality care. A crackdown on this seems inevitable, meaning that other care options will have to be provided.

The Solutions:

  • Nearly all care homes with local authority-funded residents are at least 20-25 years old and no longer up to standard. We need a new mechanism to encourage pension funds, insurers and other long-term investors to invest in this segment of the market. If this were combined with efficient management delivered by independent for-profit or non-profit providers, chosen by the investing institutions and the local authorities, the latter would have access to lower-cost and better-quality provision than is currently available and allow them to phase out obsolete stock. 
     
  • We recommend that government creates the conditions for a long-term care insurance market by the state agreeing to pick up the long-tail costs of those who insure themselves after, say, six years. This would make insurance products viable and affordable so that individuals would be able to pool their risks and insure themselves, just as they do in other areas of life. Moreover, bringing in the insurance sector would bring more order into the market, as the insurers would be responsible for meeting the costs. 
     
  • At present, care at home is contracted on the basis of hours or number of inputs, with the focus on price rather than outcomes, and with no encouragement to integrate health and social care. This cannot continue in its present state and local authorities should look in future to contract with the new providers (who are waiting to come to the UK) who have developed technology platforms and more sophisticated caregiver recruitment, along with training plans that are the stuff of transformational change. Developing insurance products for long term care will also be a catalyst for network building and increased use of technology in this sector. We foresee that commissioners, who currently know what they are getting elsewhere in terms of quality standards, will want the same level of knowledge for the home care sector. 
     
  • Older people enjoy a number of benefits, from free TV licences and Winter Fuel Payments, to lower rates of National Insurance before they reach pensionable age. These, and the pensions Triple Lock, should be reviewed, and the Personal Income Tax Allowance adjusted, so that older but wealthier people make more of a contribution to their generation’s care costs. 
     
  • A more rational and affordable care system will involve disrupting the market, but deliver greater supply, sustainability and fairness. Tinkering with the present system will not solve the looming crisis. What we need are new partnerships in a new market.

A Third Way for Britain's Railways

Britain's railways need more, not less, competition. Entrepreneur and rail analyst Adrian Quine sets out an alternative to the status quo to see off calls for re-nationalisation. 

  • Efficient infrastructure is the bedrock of a successful economy. For too long Britain has failed to take bold decisions and is lagging behind fast-growing economies such as China and India. The lack of new towns, airport runways, modern power stations and high speed internet is hampering UK growth.
     
  • The UK rail network is no exception and is a prime example of where investment is urgently needed. However it also needs a fundamental change in its structure too. The industry is facing crisis; public confidence is at an all-time low with growing calls for re-nationalisation worryingly gaining momentum.
     
  • Passengers are fed up with the status quo but nationalisation is not the answer.
     
  • Privatisation was supposed to bring about competition however this has not been achieved. British Rail (BR), a state run monopoly, has simply been replaced with largely non-competing privately-run franchises delivering the same uncompetitive model as was the case under BR.
     
  • The Department for Transport (DfT) stipulates exactly what a franchised train company can offer: dictating timetables, frequency, stopping patterns and even minor details such as whether a train has a catering trolley or not. Under the current model Train Operating Companies (TOCs) have very little room or incentive to show flair or innovation. What is needed is less central control, not more while protecting core services.
     
  • The current ‘one size fits all’ franchise model needs to be replaced with a system that is agile and best reflects the diverse needs of the passengers it serves. The railway must be competitive to encourage innovation, improve standards and drive down fares. 
     
  • Different railway routes serve different markets. The new structure needs to better reflect the specific needs of passenger types on each route – whether they be commuters, business or leisure travellers. There needs to be a better distinction between the commercial and social railway and to create bespoke models that best serve the passenger, communities, businesses, and taxpayer.
     
  • Flexible long distance train fares are some of the most expensive in the world. It is often cheaper to fly twice the distance. The current privatised railway model is largely immune from the basic principle of competition as each franchise is, in effect a monopoly in its own right.
     
  • This paper advocates a new, fresh and dynamic approach to running Britain’s passenger train services that best reflects the markets they serve while also driving down costs and improving the service for the end user. By creating choice, fares will be lowered, service standards will be raised and costs can be reduced proving a ‘win win’ for both passenger and taxpayer.

Read the full paper

Only Capitalism Can Solve The Housing Crisis

The housing crisis of ever rising prices and unaffordability can only be ended by a capitalist revolution in housing, argues leading architect Patrik Schumacher in a thinkpiece for the Adam Smith Institute.

Executive Summary:

  • Restrictive planning laws have led to enormous growth in London’s rental and house price to earnings ratios

  • Housing crisis is a failure of politics not markets and is the result of restrictive planning laws.

  • Government should resist calls to impose rent controls or mandatory long-term tenancies as they reduce supply and hamper labour mobility

  • Sadiq Khan’s plan to mandate that up to 50% of developments be “affordable” will discourage development and push up prices elsewhere

  • Micromanaging land uses creates high price distortions in our cities and should be abolished

To read the full essay, click here.

Prices not points: A post-Brexit immigration solution

  • As the UK prepares to leave the European Union in 2019, the government must create a new policy for immigrants from EU-member nations. It should also rethink its policies regarding non-EU immigrants as well. 
     
  • In recent years, UK immigration policy toward non-EU migrants has prioritised highly skilled workers. Free-movement migrants from within the EU have generally held low- or semi-skilled jobs and had strong labour force attachment. 
     
  • UK immigrants have higher education levels than natives, on average, and while the largest economic gains typically come from highly skilled immigrants, less-skilled immigrant workers make economic contributions as well. 
     
  • The empirical evidence indicates that immigration has had a negligible overall effect on natives’ employment, unemployment, and wages in the UK. However, a few studies conclude that the labour market prospects of less-skilled native-born workers have been harmed by immigration.
     
  • Reducing immigrant inflows, particularly of highly skilled immigrants, would create considerable economic costs in the short and long run. Admitting more highly skilled immigrants, from inside or outside the EU, is particularly vital to long-run economic growth. 
     
  • Auctioning employer permits to hire foreign workers would maximise the economic benefits of immigration and increase government revenue. 

Read the full paper

Monetary Policy After The Crash: Lessons Learned

  • Conventional monetary policy has serious flaws and contributed to the 2008 Global Financial Crisis. Since then, emergency monetary policy has been relatively successful but lacks clarity. We should take the opportunity to reform policy such that the same rules apply in good times and bad.
     
  • The Bank of England’s Open Market Operations (OMO) should be reformed to reduce discretion and provide financial markets with greater certainty.
     
  • We should replace the Bank of England’s 2% CPI Inflation target with a nominal income (NGDP) target. Under current policy, the Monetary Policy Committee (MPC) must distinguish between demand shocks and supply shocks. Moving to an NGDP target resolves this problem as nominal income is aggregate demand, reducing the epistemic burden on the MPC.
     
  • Central bank intervention should be restricted purely to managing the money supply.
     
  • Open Market Operations should be as neutral as possible, focusing primarily on gilts. Financial markets should know in advance which margins the Bank of England intends to exploit. For example, if the Bank of England owns more than a certain percentage of gilts of a specified maturity, they then extend asset purchases to a pre-announced basket of investment-grade bonds.
     
  • Monetary policy can buy policymakers time, but it is unable to solve underlying problems of low productivity. The Bank of England cannot raise the Natural Rate of Interest in the long-term, but free market supply-side reforms should be a priority for government.
     
  • Stress tests, designed to measure the ability of banks to withstand market shocks, are complex. This makes them vulnerable to being gamed and it leads to risks that can be felt across the financial system. Prediction markets provide the best chance we have of avoiding future bailouts by boosting market competition and punishing excessive risk taking.

Read the whole paper