Eltern John

Click and highlight for cluebat: "Eltern" is the German word for parents.

Infinite Evidence

Somebody over at HPC asked me what impact falling house prices would have on the Retail Price Index, so I had to gen up on this before giving an answer. The first port of call was to look up what's in the Retail Price Index 'shopping basket', which the NSO explain here.

It shows (page 3) that over the past 24 years, the share of 'housing' in the RPI shopping basket has increased as follows:
1987 - 15.7%
1992 - 17.2%
1997 - 18.6%
2002 - 19.9%
2007 - 23.8%
2011 - 23.8%

There is a big jump in 1997 because "Depreciation costs were added to the housing group in 1995" (I dunno why they didn't rework the old figures) and the only blip is in 2008 when the share was 25.4%. 'Housing' costs include (broadly speaking) rent, average mortgage interest payments, depreciation, Council Tax/rates, water and other charges, repairs and maintenance and DIY materials There is a separate category for 'Household services' which has also increased from 4.4% to 6.3%

Ho hum, what is the reason for this large increase in less than quarter of a century?

As I've mentioned before, Henry George (further developing Ricardo's Theory of Rent, which in turn was based on James Anderson's theory of agricultural rents) observed that land rents increase slightly faster than GDP growth generally, which is a bit counter-intuitive, because the share of the economy which we traditionally see as land-based (i.e. agriculture) is constantly declining as a share of GDP. The gimmick here is that land is fixed in supply, so as gross output rises and goods become cheaper and more abundant, the balancing figure goes to the least elastic factor, i.e. land.

Of course, while agriculture can be carried out quite happily without much infrastructure, a modern economy needs lots of 'infrastructure' and the areas where there is sufficient infrastructure to sustain it are of necessity quite small (the UK has plenty of physical land, that is not the issue here); more infrastructure attracts more people and more activity, which in turn attracts more infrastructure, which in turn attracts more people and more activity and so on (agglomeration). The lucky people who happened to 'own' the land on which all this takes place are now quids in, of course.

I've submitted other statistical evidence to support this. While house prices around the UK are broadly proportional to local average wages, the house price-to-wage ratio is higher where wages are higher, i.e. where the economy is more advanced, a larger share of local GDP goes in rent.

Problem is, as soon as you mention Ricardo or Henry George, the Homeys and Faux Lib's either stick their fingers in their ears and sing la-la-la or subject you to ad hominem attacks. And as Robin Smith never tires of pointing out, I'm probably wasting my time with 'infinite evidence' because people are so conditioned to believe that it is acceptable to tax incomes but not to tax land values, that they will simply deny the validity or relevance of any evidence which I provide to support the opposite conclusion.

The bitter irony is that arch Home-Owner-Ists like Kirsty Allsop know perfectly well that all this is true, which she expresses in the mantra "Location, location, location", i.e. the value of any plot of land is dictated by everything else that goes on in the vicinity of that plot, and not the efforts of the owner of the plot.*

Her advice is always to buy in an "up and coming area" where e.g. somebody else is going to pay (probably out of your income tax) for a new railway station to be opened in the future, on the assumption that you can then make a windfall gain by having bought a plot there beforehand (and hopefully get more back in windfall gain than you had to pay in income tax). My advice is that it would be better not to tax incomes in the first place and just to tax the rental value of the land instead.

* The occupant of any plot of land can have some small impact on the value of neighbouring plots (whereby pushing them down is easier than pushing them up) but not on the value of the plot he occupies (short of polluting it, but even that does not affect the location value, it's merely a negative improvement).

Home Office Fun

Two stories from today's Metro remind us that the country is run by idiots.

Page 1: Making meow meow, BZP and spice illegal will not stop people from trying them but will put them at risk from dealers who mix them with dangerous cutting agents, according to a report from the UK Drug Policy Commission.

In 2008 and 2009, when the now-banned meow meow was growing in popularity, cocaine-related deaths dropped by 28 per cent. The relaxation and subsequent re-introduction of controls on cannabis use also had no impact on the general decline in the drug’s use, the report claims...

However, the Home Office said it had no plans to change drug law. "We believe the Misuse of Drugs Act works and continues to protect the public from the serious harms caused by illicit drug use," it added.

Page 2: The article is a nice bit of shroud waving by The Police Federation. Yes of course the police force could be put to better use or cut costs a bit, that's not the point; the relevant bit is right at the end:

A Home Office spokesman said: "As a service spending £14 billion a year of public money, the police can and must make their fair share of the savings."

Yup, that £14 billion is about one per cent of GDP, or about two per cent of total UK government spending (prisons is another £4 billion or so on top of that). Seeing as maintaining law and order is the corest of the core functions of state and only makes up two per cent of total spending anyway, I don't think this is the right place to start if you're trying to save money.

Would it not make more sense to look at the £14 billion we send to the EU each year, or the £10 billion which the Department of (for?) Work & Pensions spends on administration costs each year?

Wince

Westminster Council adopts an idea from UKIP's Welfare Manifesto

From our Welfare Manifesto (2010 version, pdf)

6.5 UKIP therefore recommends that social rents be set at a single inclusive figure (rent plus Council Tax, net of notional Council Tax and Housing Benefit) calculated at around 20 per cent of each household’s gross income: This would ease the poverty trap for the most needy; social tenants on very low incomes would keep 49p for every £1 earned (assuming a flat tax rate of 31%) rather than 4.5p as at present.

It would also encourage households on higher incomes to move into the private rented sector or owner-occupation, as above a certain level of income, the social rent they are paying would be higher than a comparable rent in the private sector or the cost of a repayment mortgage. This may seem unfair, but it is exactly these households who will benefit most from UKIP’s proposal to double the tax-free personal allowance, so taking the two measures together, very few households will lose out.

The preceding paragraphs 6.1 to 6.4 are worth a read if you want to see the workings. I explained how the extra 'about 20%' could be collected with the minimum of administrative hassle by using K-codes for PAYE on my 'blog here (scroll down a bit to the section beginning "Here's my crash course in the existing PAYE system").

Lo and behold, from yesterday's Daily Mail*:

Conservative-led Westminster Council has asked Government for new powers to introduce a sliding scale which would link social housing rents to incomes. The move comes after the council found it had 2,200 social housing tenants earning more than £50,000-a-year, and more than 200 on over £100,000...

Many of those on £100,000 or more were paying rents of £97-a-week for a one bedroom flat, or £110-a-week for a two bedroom place, said Mrs Roe. She said a new formula should be applied which would see tenants paying 35 to 40 per cent of their net income on accomodation, the national average.

They say 35 to 40 per cent of their net income, we said 20 per cent of their gross income, which comes to the same thing in £-s-d, only 20 per cent of gross income is far easier to calculate.

From the point of view of the council, there must be a revenue maximising point; i.e. if they set the rate too low then they won't get much rental income and much longer waiting lists; if they set it set it too high then they'll discourage out of work and low earning tenants from earning more and you'll lose all your better earning tenants.

Sure, there may be some middle to higher earners who would end up paying above market rents on the place they're in in the short term, but - even if they don't move out - the advantages to them are:

a) The council will be more inclined to upgrade them if a nicer council house or flat becomes available, and

b) It's like unemployment protection insurance with a mortgage; you overpay while you are still working, but if you lose your job, take a pay cut or retire and draw your pension, then you get your money back.

c) It's got to be better than being turfed out entirely, as the Tory government has vaguely suggested, a strategy with pretty obvious unintended consequences...

d) The local council will then give preference to people on the waiting lists who have jobs, so you'll probably end up with nicer neighbours.

* Spotter's Badge, MBK.

The end of a fine Eurovision tradition

I don't mean that Terry Wogan doesn't do the sarky comments any more, this is more fundamental!

When I was a lad, only proper European countries entered the Eurovision song contest, but then they went a bit mad and allowed Israel to enter.

Cue much heated debate at school about whether Israel was actually a European country or not, primarily done to wind up Collins (who was Jewish). Then the same all over again when Turkey was allowed to enter, much muttering and spluttering about whether it's a European country or not (quite clearly it isn't - it's not on the continent of Europe, and unlike Israel, doesn't even have any European inhabitants).

And so on and so forth. Every time they allowed yet another even-less-European country enter, there was much Righteous Indignation (especially if such a country won).

In the smart arse corner, then there is usually somebody who points that Eurovision is merely the name of an international television distribution network, which happens to have named the song contest after itself, and this does not imply that it is restricted to European competitors only (in the same way as the British Grand Prix is not restricted to British Formula One drivers).

But it seems that nobody can be bothered to do the curmudgeonly thing and point out that Azerbaijan is not, repeat not, a European country. It has borders with Chechnia, Georgia, Armenia and Iran, FFS. So I'll have to do it myself.
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Geek points for the first person to point out that Eurovision is the name of a television distribution network and is not meant to imply that the competition is restricted to entrants from European countries etc.
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UPDATE. Here's my personal opinion of which countries are European and which aren't. There are a few countries which I'd consider to be 'Not really Europe', the fact that they aren't Arab or Asian either is not my problem. Romania just scrapes in because it uses the Latin alphabet and is predominantly Christian. Plus, it gives us access to those strategic Black Sea ports.

UPDATE UPDATE: In the original version of my map I wrote 'Europe' rather than 'European' which led to some confusion, so I have amended it for clarity:

Killer Arguments Against LVT, Not (130)

I linked to an article which claimed that retail prices are slightly lower in London than Swindon, and Sobers (correspondent for farming and Swindon, and as it happens, landowner and hence anti-Land Value Tax campaigner) hit back with one that pointed out that prices were much the same.

Fair enough, for the sake of this discussion, we might as well assume that retail prices are more or less the same anywhere in mainland Great Britain. I resisted the temptation to move the discussion on to LVT, but Anon, in the comments did it for me:

Interesting but as a resident of [London], LVT would probably make things more expensive for me as London shopkeepers who bought their premises at a low price now have to pay high LVT.

Well, exactly not. That's the whole point.

1. We know that rents for retail premises in central London are (say) ten times higher than in e.g. central Swindon, but why? It's not because retailers can charge so much more for clothes, electronic goods, stationery, whatever, in central London, it's because they can sell ten times as many goods from the same size shop. It's not so much that London landlords arbitrarily demand ten times as much in rent, it's that retailers are prepared to pay ten times as much; it's like if there were an alternative fuel to petrol which gave you 400 mpg instead of 40 mpg, then people would be prepared to pay ten times as much for it.

2. We also know that the UK tax system has something very close to LVT, called Business Rates, which is about a third of the total rental value of commercial land and buildings (OK, it's about 40% of the net rental value after deducting Business Rates, a circular calculation which comes out at about a third). So the Business Rates per square yard of retail premises in central London is also ten times as high as the Business Rates per square yard in central Swindon.

3. We know, on the basis of evidence submitted, that retail prices for generic, freely tradeable and easily transportable physical goods are pretty much the same in London or Swindon. Therefore we can safely conclude that Business Rates (and by extension LVT) does not increase the price to the consumer or cut into the profits of the retailer, they merely take a chunk of that balancing figure which would otherwise go to the landlord.

4. The anti-LVT crowd will then retort "Ah, that's fine in principle for tenant businesses, but what about owner-occupier businesses 'who bought their premises at a low price and now have to pay high LVT'?" Well, what of them? They currently pay ten times higher Business Rates in London than in Swindon, which has absolutely no effect on selling prices or the profitability of retailing, so why would replacing Business Rates with LVT have any effect either?

5. We know that some retail premises are rented and some owner-occupied, and that this clearly does not make a difference to retail prices. These big retail chains probably own some of their shops and rent others, but they do not sell for lower prices in the shops they own and for higher prices in the shops they rent. Or, why would a landlord ever rent out his premises to the highest bidder if he could use the shop himself to undercut nearby tenant businesses?

6. As a parting shot, the idea behind full-on LVT is to replace taxes on economic activity with taxes on rental values. When you buy something for £100 in the shops, approx. half of that goes to HM Revenue & Customs (in VAT/import duty, National Insurance, income tax or corporation tax). And to end up with that £100 in your pocket which you spend, you must first create about £200 of value for somebody else. And so on ad infinitum.

7. So the current tax system clearly pushes up retail prices enormously and/or depresses your own income, so even if (which I don't admit), Business Rates or LVT were to push up prices slightly (for which there is no evidence), it's pretty obvious that reducing other taxes, £ for £, would double your employment or business income and/or halve the prices you have to pay in the shops.

Just sayin', is all.

Nice bit of Indian Bicycle Marketing

Zoe Williams, kicks off an article on Comment is Free titled "The reason mothers work – and Tories try to stop them" with this bald claim:

Benefit cuts, childcare costs and marriage tax breaks are forcing families back into a single breadwinner model"

1. None of her assertions or inferences are true (to any great extent), but you must always remember that the behaviour of the three big UK parties is summed up in the book 1984:

2. Under this lies a fact never mentioned aloud, but tacitly understood and acted upon: namely, that the conditions of life in all three super-states are very much the same... It follows that the three super-states not only cannot conquer one another, but would gain no advantage by doing so. On the contrary, so long as they remain in conflict they prop one another up, like three sheaves of corn. And, as usual, the ruling groups of all three powers are simultaneously aware and unaware of what they are doing.

3. To wit, if a stereotypical Tory voter reads that article, he will think "Hurray! Stick it to those benefit scrounging cheats! A mother's place is in the home and so bring on those marriage tax breaks!" and a stereotypical Labour voter or feminist will think "Boo! Those nasty Tories are slashing benefits, preventing mothers from going to work and imposing their patriarchal view on society!". A Lib Dem voter probably muddles his way between the two.

4. So, that first sentence reinforces whatever prejudices people had anyway, and makes them more likely to vote for whichever party they were going to vote for anyway. The interesting bit is why the Tory government doesn't point out that these claims are not true; benefit rates have not been reduced, the Tories have merely tinkered at the edges a bit; childcare costs are dictated by childcare providers, not the government; and there is not, as yet, an actual tax break for marriage (unless I missed that memo?)

5. The answer is, there would be no advantage to the Tories of doing so; no stereotypical Labour voter is going to vote for them anyway, and if they admitted that welfare policies have developed piecemeal under both Labour and Tory governments without any big swings in either direction, then they'd lose the support of the stereotypical Tory voters.
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When you read the article, the only example of benefit cuts she can actually point out is that the childcare element of Working Tax Credits now only covers 70% and not 80% of eligible childcare costs, which is true. However, this does not mean that people have to pay 30% rather than 20% of childcare costs - which would be a fifty per cent increase - it is far less dramatic than that:

a) You couldn't claim for 80% of the full amount anyway, the amount for which you can claim is capped at £175 a week for one child and £300 a week for two or more children. You had to pay the rest yourself.

b) For children aged three to five, there is a much better system, a leftover from the Tory government of the 1990s, called Early Years Funding. If you send your child to nursery, the council just gives you a voucher/part payment of 15 hours x about £4 a week, i.e. £60; non-means tested, non-contributory, sorted. Remember: the Tories increased this from 12.5 hours to 15 hours last September, so that's an extra £10 a week for millions of parents.

c) The eligible amount from (a) was reduced by the amount of EYF you got anyway, you only were entitled to claim 80% of the net amount.

d) The fact that you can claim for 80% or 70% of something does not mean that you will get it; the childcare element of Working Tax Credits is reduced by 41 pence for every £1 that either parent earns (this used to be 39 pence, long story) above a certain threshold. So if the two parents earn e.g.£22,000 between them a year, they lose £6,388 a year of their tax credits, i.e. £123 a week.

e) So let's assume that these two parents have two children at nursery and one is aged three to five, and it costs them £350 a week. They can only claim for £300 minus 1 x £60 EYF = £240 a week, their maximum entitlement is £240 x 70% = £168, and they lose £123 of this, see (d), so they get £45 tax credits plus £60 EYF = £105.

f) Using 80% and 12.5 hours EYF, they would claim for £300 - £50 = £250 x 80% = £200, reduced by £123 = £77, plus £50 EYF = £127.

g) So their net nursery costs have gone up from £223 to £245, which is only a ten per cent increase, and not the fifty per cent increase which the article suggests.

Fairly interesting...

From an article in The Daily Mail a few weeks ago:

Consumers are being hit by a 'postcode lottery' in the cost of buying goods, with some paying at least £500 more for exactly the same items. A study of the prices of 200 items at 12 different locations nationwide revealed that some shoppers are being ripped off and paying up to £537 more than in other areas. Researchers compared the cost of electrical products, homeware, stationery, toys and entertainment.

The average cost of the 200 items came to £15,508 in Swindon, in Wiltshire, and £14,971 in London. Swindon was the most expensive shopping destination in the country with prices £171 above the national average, website Kelkoo discovered.

In Wrexham, north Wales, and Peterborough, Cambridgeshire, customers were paying £164 and £148 above average. Remarkably London, despite its high cost of living, has the cheapest retail prices in the country, with the goods costing £366 less than the average, according to the report. The cost of electrical goods alone was £445 lower in London than it was in Wrexham...

Now, we don't know how rigorous the research was, and it appears to have been carried out by a price comparison website called Kelkoo (who have a vested interest in getting people online to shop around), but it's interesting nonetheless, as it illustrates, yet again, that competition drives prices down. Very crudely speaking, the bigger and less isolated the town, the cheaper things are in the shops.

But remember: this generalisation only applies to physical goods which are both produced and consumed a long distance from the actual point of sale, and which are traded all across the globe. Services, and goods consumed at point of use - i.e. a cup of coffee, a beer, a tank of petrol - are very much more expensive in London because you are paying a lot of embedded rent.

MBK e-mailed me a link to a book...

... the relevant two pages are on Google Docs.

Well worth a read.