Home-Owner-Ist understands economics - shock

From The Evening Standard:

But while home buyers may welcome a potential stamp duty cut, it could also lead to them paying bigger monthly mortgage bills, a finance expert has warned.

Sarah Coles, a senior personal finance analyst at Hargreaves Lansdown, said potential cuts to stamp duty may risk “doing more harm than good”. She said stimulating housing market demand could push house prices up further, at a time when the supply of available homes is already tight. Borrowers could then find themselves paying higher monthly mortgage costs if the price they have had to pay for their home has increased.

Correct. Reducing taxation on land and buildings mainly benefits the vendor, not the purchaser. I'm just surprised to see this reported in that bastion of Home-Owner-Ism - a huge chunk of their income is from property porn adverts, so they have to toe the line.

UPDATE: LF makes a good point in the comments. For movers who are buying and selling, SDLT is a bit of a slap in the face. Nonetheless, the overall effect is to depress headline house prices.

"Oh no, they won't!"

From This is Money, spotted by Mombers:

Forecast rises in interest rates could force landlords to raise rents to meet mortgage affordability criteria, or risk being trapped on higher rates, according to a buy-to-let expert. This is because interest costs across the life of a buy-to-let mortgage would more than quadruple, going from £115 a month in interest now, compared to £479 with the rise in one example.

The Office for Budget Responsibility has forecast a worst-case scenario whereby a 'wage spiral' or energy price shock would require the Bank of England to increase base rate to 3.5 per cent in 2023 to curb inflation.

Nope.

Rents are the Maypole around which house prices dance. Current selling prices and/or what people are prepared to borrow is the Net Present Value of the rental income (for a landlord) or the rent saved (for a first time buyer).

More prosaically, prices will settle at approx. the level where the monthly mortgage payments are about the same as the rental value. So sure, if there is a big interest rate hike, selling prices will fall (all things being equal) so that new buyers' monthly mortgage payments are still approx. the same as the monthly rent.

Landlords can't 'pass on' that fall in value any more than they can 'pass on' higher interest rates, a tenant would just move out and rent from a new landlord who had bought at the new lower price/higher interest rate.

If old landlords could 'pass on' higher interest rates and rents went up, then madness would ensue. The new landlords would be able charge the new higher rent, even though their interest payments were still based on the old lower rents i.e. they would be making a super-profit from Day One which would be competed away almost immediately.

The "backward bending labour supply curve"

From an editorial in The Telegraph which, unsually, makes some good points:

Jeremy Hunt, Britain’s longest-serving health secretary, spent years fretting over health budgets and knows better than most how easily the NHS can swallow up extra funds without patients seeing a jot of difference if the money is badly targeted.

“The one thing the Government must do before it spends any of the money is make sure there is capacity in the NHS for that money to be used for what you want it to achieve. If you allocate £5 billion for extra staff, for example, but those extra staff don’t yet exist, that money will just vanish."

... Rishi Sunak, the Chancellor, allocated £20 billion of emergency funding to the NHS to cover the cost of Covid-19, of which £15 billion was actually spent. But according to the Nuffield Trust, only £2.7 billion of that was spent on staffing costs. Given that 60 to 70 per cent of hospital’s budgets are spent on staffing, questions are being asked about where the rest of the money went.

We already knew or could have guessed most of this, that's just to set the scene. Here's the interesting bit:

Another of the traps which Mr Blair fell into was in allowing spending increases to be swallowed up by pay rises. While doctors unquestionably deserve high salaries [that's their opinion], the brutal truth is that bumping up GPs’ pay packets does not translate to better patient care.

Almost nine in 10 salaried GPs work less than full time, and there is a danger (accepted in private by those in the health sector) that higher pay will make it financially viable for even more of them to cut their hours without being any worse off. Nor does extra pay across the board incentivise GPs to work in the most deprived communities, which often have the worst access to healthcare, translating into lower life expectancy.

This is an example of the 'backward bending labour curve'. From Lumen Learning, (scroll down to the section on Labour Supply):

To see how changes in wages affect the supply of labor, suppose wages rise. This increases the cost of leisure and causes the supply of labor to rise – this is the substitution effect, which states that as the relative price of one good increases, consumption of that good will decrease. However, there is also an income effect – an increased wage means higher income, and since leisure is a normal good, the quantity of leisure demanded will go up.

In general, at low wage levels the substitution effect dominates the income effect and higher wages cause an increase in the supply of labor.

At high incomes, however, the negative income effect could offset the positive substitution effect and higher wage levels could actually cause labor to decrease. A worker making $800/hour who receives a raise to $1200/hour may not have much use for the extra money and may choose to work less while maintaining the same standard of living, for example. This creates a supply curve that bends backwards, initially increasing with the wage rate but later decreasing.

I'm happy to say that this applies to me. Once I'd finished paying rent fees to private schools, I dropped to a four days a week and started paying in the max. to my pension fund, but I still have more disposable income than when they were at school (and enough to cover my modest lifestyle). That's largely an effect of our insane tax system, but it's nice to be on the winning side of it for once.

Apologists for land bankers at work.

More nonsense from Centre for Cities, the opening sentence contradicts the headline just to warn you that you are about to ride the rollercoaster of flawed logic:

No, landbanking does not cause the housing crisis – here’s why

Landbanking is caused by the current discretionary planning system. A new flexible zoning system will end landbanking and the housing crisis.

So, er, landbanking does not cause the housing crisis (which is not a crisis, it's deliberate); but the planning system causes landbanking... which in turn causes the housing crisis?

The key paragraph appears to be this:

The rational strategy for developers is to build at a slow rate which maintains high prices for their product and avoids swamping the local market with new supply. Crucially, this behaviour is possible because every other competitor faces the same bottleneck on accessing land for development. They are not able to swoop in, buy another piece of land, and quickly build and sell homes for a cheaper price... If a new flexible zoning system were introduced those behaviours would disappear.

Land is land, whether it is owned by a farmer, a speculator or a home-builder/land banker; whether it has planning; is likely to get it or is just a long shot. Whoever owns it is the landowner. They all have the same incentive, to drip-feed it onto the market.

It's like having money in the bank which is earning interest (those were the days!). You only withdraw what you need when you need to, and you leave the rest in the bank. You don't earn interest when you withdraw it, you earn interest by not withdrawing it. In the same way, landowners maximise their long-term wealth by not selling land while it is steadily increasing in value (earning interest).

So in their neo-liberal fantasy world, let's assume the government grants blanket planning for all land within a mile or two of each town or city, enough to build tens of millions of homes.

What is the profit maximising strategy of Barratts et al now? It is to continue drip-feeding their existing land bank onto the market*. No change there.

Once Barratts et al have used up their land banks, they'll have to go to farmers and speculators to buy more. And the farmers and speculators will adopt exactly the same profit maximising drip-feed strategy. So the 'land' bottle-neck just moves up one level and the 'labour and materials' bottle-neck is unchanged.

It's not a cartel or collusion, all landowners have the same incentives and they all behave the same. If one landowner breaks ranks and decides to sell all his land and buy a Ferrari or a yacht, it will just be bought by somebody else with exactly the same drip-feed incentives.

* It's not just that new-prices fall slightly if they build 'too many', it's also that their inputs are very inelastic, a small increase in demand for labour, bricks, timber sees wages and prices shoot up. I remember chatting to plasterers and electricians in east London in the years after Canary Wharf was completed and they reminisced fondly about earning silly amounts of money at the time.
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They also trot out the usual nosense about seventy percent of homes in Austria being 'self-built'. They are nothing of the sort! It's a tax reduction strategy - instead of buying land-plus-house from a builder as one package and incurring stamp duty and VAT on both elements, people buy the land from the builder as one transaction (stamp duty, but no VAT) and then get the same builder to build the house (VAT but no stamp duty) as a separate transaction. And it's not like houses in Austria are cheap either. So they haven't given it much original thought.

"Netflix raises UK prices to cover cost of content"

The usual slightly weird reporting from the BBC:

Netflix is raising the cost of some of its UK subscriptions from next month, its customers have been told. The streaming service said the price rises reflected money spent on content.

Netflix is a superb service and their (few) original series are pretty good. I don't like all of them, but there a couple of good ones each year (and lots of people watch 'The Crown', sigh). The price they charge reflects purely 'what they can get away with' and has little to do with what they spend on original content. I'll pay to watch something if I like it, I couldn't care if it was done on a shoestring or it costs £ millions per episode. Clearly, for the bought-in content, the IP owner holds out for a large chunk of the income, so that's probably pretty low margin.

Its standard monthly package will go up from £8.99 to £9.99 and its premium one will rise from £11.99 to £13.99, but its basic plan remains at £5.99*.

So still superb value, then?

However, comparison site Uswitch said the timing of the price rises was unfortunate with UK citizens living under new national lockdowns.

Supply and demand. The lucky majority who still have jobs are spending a heck of a lot less on other fripperies, so they have more to spend on streaming services, computer games etc. And if I get the sack and have to live on a tight budget, Netflix will be one of the last things I cut back on. So Netflix can bump up their prices a bit. So far, the business has not been particularly profitable, so good luck to them.

But Netflix faces tough competition from rivals, such as Disney+, which has also announced price rises of £2 per month up to £7.99 or £79.90 for a full year.

There's also good old fashioned terrestrial TV (yours for the price of a TV licence); Amazon Prime (about £6 a month, but which is shit); some cable/satellite TV channels (which seem to be very expensive); and there is loads of stuff on YouTube (free). So there's more 'tough competition' than you can shake a remote control at.

* I originally only subscribed to Netflix so that The Lass could watch 'Riverdale', which was all the rage in her class at school for a while, so basic package £5.99. Then the rest of the family got into it (including me) and found stuff they liked, so we're now on £9.99 for two screens. Even that's not always enough, and I sometimes have to pull rank and chuck out one of the kids.

Neal Hudson's one-to-ten ratio

Somebody asked me recently whether this ratio still holds.

The answer appears to be, yes, there is still a ratio but since 2005, it is closer to one-to-eight than one-to-ten. Maybe he was using different data sources? Maybe it's do with Help-to-Sell and all the similar subsidies that Labour introduced post-2008? See *UPDATE*. I used numbers from here and here. If anybody finds transaction numbers for a longer period, please send me the link.

The reason for this is simple. House builders know that if they build more homes, their selling prices would drop and costs would increase. They work on marginal revenue and marginal costs, which are much lower (or higher) than overall average revenue (or costs) and they stay at the narrow sweet spot which maximises marginal profit per unit i.e. by drip-feeding one new home for every seven existing homes that are bought and sold. So anybody who believes that handing out planning permissions like confetti would lead to more construction and lower prices is living in cloud cuckoo land, home builders will always stick to the one-to-eight profit maximising level.

OK, we can argue over cause and effect, but it's clear from the chart that the blue completions line lags (i.e. responds to) the red sales line by about a year. Homebuilders make their decision on how many units to start when sales are high, and this year's completions depend on last year's starts, in extreme situations (like 2008) they just leave things half-finished (or something like that).

This is quite unlike mass-produced goods where average costs go down by much more than selling prices if output is increased, so as far as a manufacturer is concerned, the more the merrier. In 2008, house prices fell by about a fifth and supply fell buy a half to maintain or at least maximise margins.


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UPDATE I contacted him on Twitter @resi-analyst and he posted this chart showing a one-to-ten ratio and the impact of HTB:

"A housing supply absorption rate equation"

From an excellent article here.

The most important bit is this:

... radical town planning policy changes have been proposed around the world. By allowing higher-density housing [or the same density on larger areas], proponents of these policies expect that the rate of new housing supply will increase enormously, reducing housing prices...

When demand growth is high, you sell more. This makes sense. You sell into a boom and withhold sales during a bust. This is important because one argument for relaxing density restrictions is that new supply would occur at such a rapid rate that prices would fall. But falling prices reduce supply. There is hence a built-in ratchet effect in housing supply dynamics.

Nailed it!

This shut down does have its upsides...

Tesco Edmonton, a couple of days ago. It might have gone up or down since then:



Surprisingly, the petrol stations in my area, which are always about 10p/litre more expensive than Tesco are holding out, and are still asking for about 120p/litre.

"My advice for Rishi Sunak: superforecasters won’t make your Budget better"

Stephen King, HSBC's Senior Economic Adviser gloriously misses the point in yesterday's Evening Standard:

Rishi Sunak, the Chancellor of the Exchequer, is presenting his first Budget on March 11.  To do so, he'll need some vaguely credible economic forecasts. Without them, the fiscal arithmetic is no more than guesswork. In the bad old days, chancellors simply looked at themselves in the mirror and came up with numbers that best suited their political purposes.  

Gordon Brown kept changing his forecasts to prove there could be "no more boom and bust", singularly failing to spot the looming global financial crisis.

In the late Eighties, Nigel Lawson persuaded himself that Britain was about to embark on a prolonged period of faster growth and lower inflation, conveniently ignoring the housing boom that led to the early-Nineties recession.

He goes on to dismiss the whole idea of forecasts - either they are wrong; politically unpalatable; or they are self-fulfilling prophecies.

And that's ultimately the problem with economic forecasting, particularly in the public realm. Some things just aren't forecast for the simple reason that, until they actually happen, it's easier to pretend otherwise.

In May 2008, midway between the failures of Northern Rock and Lehman Brothers, the Bank of England apparently regarded the risk of recession as very low — in hindsight a seemingly ridiculous conclusion.

Does he not even bother to read what he has written and look for the most basic patterns - to wit house price bubble and credit bubble => house price crash and credit crunch => recession? he gives two recent examples of exactly that. That's all you have to look out for.

To make matters even easier, these crashes happen every 18 years or so (he mentions 1990 and 2008, next one due 2025 or 2026).

The Chancellor has a choice - press on with Home-Owner-Ism and worry about the mess later, or take active steps to dampen leveraged land price speculation.

He can re-adopt 20th Century Georgism Lite (mortgage caps, rent caps etc) or he could do the decent thing and replace as many taxes as possible with Land Value Tax.

Plastic bag tax - as expected, it didn't work as planned.

As I said eleven years ago, when the idea was first mooted in Wales:

4. [If the tax is] anything more than [0.1p per bag] we'd have a situation like in Ireland where people buy more, thicker bin-liners, nappy bags etc, so the overall environmental benefits are questionable to say the least.

I was initially taken in by articles like this (BBC, 2015) reporting "plastic bag use down 80%". Fair enough, I thought, I was wrong. With the benefit of hindsight and reading between the lines, Tesco were being a bit sneaky and didn't include 'bags for life' in their total.

So I was correct in principle, although my guesses on what substitutes people would buy were off the mark. From the BBC, today:

Sales of "bags for life" rose to 1.5bn last year as the amount of plastic used by supermarkets increased to 900,000 tonnes, Greenpeace research has found.

Campaigners are calling for higher charges for the bags or a complete ban as the research showed households bought an average of 54 a year... Bags for life must be used four times to be better for the environment.

On a human level, I really don't get it. I was caught out twice after the tax came in and paid the 5p for a disposable bag. Damn. Since then, I usually remember to take proper cloth bags with me to the supermarket. If I do a big shop, I'm with the* car anyway, so worst case I unload the stuff from the trolley straight into the boot, no biggie. If I pop in to the corner shop on the way home, I don't buy more than I can carry with two hands. (And what the hell does an average household do with their piles of bags for life?)

On the other hand, on a human level, I can understand it. If you're at the checkout with £50 of shopping for the family for the next few days, who cares about another 20p or 30p for the bags/convenience? Obviously, not very many.

So, the question is, should the whole thing be abandoned as a bad job, or should the tax be hiked ever higher? We can rule out a "complete ban", that's cloud cuckoo.

* Strictly speaking "with a car" as I have more than one, but that sounds odd.
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This bit winds me up as well:

Waitrose was ranked top for cutting its packaging and trying out refill stations for products such as coffee, rice, pasta, wine and detergent.

Morrisons came second and was praised for setting a quantified target to increase reusable and refillable packaging, as well as making its loose and refillable products 10% cheaper than packaged alternatives.

Sure, they sell stuff 'loose'. Does that reduce the amount of plastic used? Does it heck. You are expected to put your 'loose' items into a flimsy plastic bag!

Being me, I don't bother with the flimsy plastic bag, I just hand the check out assistant three loose carrots (or whatever it is I only need a few of), they weigh up and charge me for the carrots. If you put them in a flimsy plastic bag, they weigh the plastic bag with contents and charge you for the bag as well.

And there is a trade-off between food waste and packaging waste. To a large extent, the packaging is there to reduce food waste. Think egg boxes. Just because the packaging is thrown away does not mean that it hasn't served a useful purpose.

Laziness - a driver of, and a brake on, human progress

People use the word 'capital' to mean lots of quite different things, especially in economics.

In its purest sense, I like to define capital as 'labour saving devices'. From stone tools and animal pelts for clothing (or whatever the earliest true labour saving devices were), up to sat nav's superseding maps, which superseded using your own experience and memories (or whatever they invented last week).

The whole idea is that people spend some time inventing or discovering or developing something which enables them to achieve the same results for less effort (or better results for the same effort, or something that was previously impossible). Sooner or later, everybody learns how to do it, and everybody benefits. That's capitalism at its finest.

This is all good stuff, but let's not forget that ultimately, laziness was the driver behind all this.

So 1:0 for laziness!
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Clearly, there are situations that are not so clear cut.

a) Business see wages as a cost, so newspapers replace type-setting with word processing; supermarkets replace shop assistants with self-checkouts. In the long run, this aids human progress, but in the short term, it's no consolation for people who have, or who'd like to have, a job as a typesetter; shop assistant.

b) People can guard their own trade secrets as jealously as they like. That's human nature, sooner or later, competitors reverse engineer them and we all benefit; the nicer you are to your employees, the less likely the trade secrets get out, so in the medium term at least the employees benefit.

Where it goes too far is government protection of patents and IP rights, especially for things which aren't really a scientific or technological advance. One business' progress is a brake on every other business, but patents lapse and then everybody else can pile in.

That's a contested goal for and against laziness. The one for laziness is given after close scrutiny by the VAR team.
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And there are situations where laziness is a massive brake on human progress, which is rent seeking in all its forms.

Each individual wants an easy life and something for nothing. So everybody wants to pack in work and be a landlord; home-owners want house prices to go up even if that means their real wages are declining. People play the lottery, even though its a negative sum game and the average player ends up worse off.

Businesses want to take out patents on things purely to stymie and stifle the competition; they want tariffs to protect them from foreign competition. The laziest team member does just enough to not get chucked out and wants their share of the team effort.

Members of mutually owned businesses vote to become shareholders for the one-off, up-front windfall gain of free shares, even though in the long run, they are marginally worse off and everybody else is a lot worse off.
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That's a clear goal against laziness, making the final result 2:1 for laziness being a driver of progress.

Another piece of the Thomas Cook puzzle

As I mentioned a couple of weeks ago, there were/are lots of groups with an interest in seeing Thomas Cook's operations keeping going. What tourists are paying £1,000 for is to  be somewhere nice and hot for a week, the flying there and back - which is what Thomas Cook was in charge of - is a pain in the bum. The marginal/average cost of flying a plane full of UK tourists to their destination in Europe and back is about £100 per passenger, the value/cost to everybody concerned (of the actual holiday, using up limited days' leave from work) is far in excess of that.

The BBC report a good example of such a group, which hadn't occurred to me before:

The sudden collapse last month of one of Europe's biggest travel groups, Thomas Cook, ruined the holidays of 600,000 stranded tourists. Hundreds of thousands more had trips booked when the news was announced.

But for parts of Spain's tourist sector, Thomas Cook's demise is also an existential threat... The Spanish Confederation of Hotels and Tourist Accommodation has said that 1.3 million autumn and winter visitors will be unable to fly into Spanish destinations.

This will result, it says, in the shutting down of at least 500 hotels, generating losses to the tourism sector running into the hundreds of millions of euros.

Spain's government has announced a package of measures worth €300m (£260m; $330m), including emergency credit lines and a reduction in airport fees, particularly for hubs in the Balearic and Canary islands, plus plans to spend €500m in improving tourism infrastructure.

Surely, that €300m (or €800m, or whatever) would have been more than enough to take over Thomas Cook's airline business (plus whatever other bits they need) and keep it going, maybe even turn it round? Stuff like the leases on the planes; staff wages (it's a lot cheaper keeping a team going than assembling a new one); the take-off and landing slots; all the information about who's going where and when.

Thomas Cook's 2018 accounts show that it (they?) had a decent operating profit/positive cash flow from operating activities. What tipped it (them?) into big losses were interest costs and the usual 'cost of intangible assets' nonsense. The new owners of the business don't need to take on the ghastly debts, that's Thomas Cook's old creditors' problem (many of whom will be entirely innocent in the whole mess; some of whom will be complicit and it serves them right).
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To cut a long story short, the Spanish government could simply run the airline which takes UK tourists to Spain. Everybody wins.

Rocket and Feather

Crude oil price over the last month:

Heating oil price over the last month:

Just sayin'.

Don't just book it...

From The Torygraph:

As many as 150,000 Thomas Cook passengers have been left stranded abroad awaiting repatriation after the travel giant ceased trading.

The company was unable to secure the extra £200 million needed to keep the business afloat following a full day of crucial talks with the major shareholder and creditors on Sunday, leaving thousands of travel plans in chaos.

This morning, the last Thomas Cook flights landed in the UK, with staff in tears and passengers coordinating a 'whip round' of donations. Transport Secretary Grant Shapps said dozens of charter planes, from as far afield as Malaysia, had been hired to fly customers home free of charge and hundreds of people were working in call centres and at airports.

I really don't get it.

Thomas Cook (not sure which bits, the corporate structure is unclear to me) went bankrupt and the administrators pulled down the shutters. Sacked their staff, cancelled future flights etc.

This leaves lots of people who have to get home somehow. A lot of them ended up paying extortionate ticket prices to get home. This illustrates my point that a large part of airline ticket prices is pure rent. They could get away with it because of temporary scarcity. Thomas Cook's jets were parked somewhere, their slots left unused with all their pilots and crew out of work - while planes and crews "from as far afield as Malaysia" were being hired at huge cost. Why not use what's nearest to hand?

'Somebody' has to pay for the stranded passengers to get home. For the purposes of this discussion, it does not matter whether that is the passengers themselves, their holiday insurance companies, ATOL, the UK government. And that cost should be kept as low as possible.

My question is, why didn't the UK CAA or ATOL simply chip in for one or two week's operating costs, long enough to get everybody home? That would be a lot less hassle than sorting out a hundred thousand individual insurance/compensation claims (and "hundreds of [extra] people... working in call centres and at airports"). It would work out far cheaper for the 'somebody' who ends up footing the bill, that saving being equal and opposite to the super-profits/rents which surviving airlines have just collected, plus the reduction in admin and hassle for all concerned.

Killer Arguments Against Citizen's Income, Not (23)

Summary of thread started by James Medlock on Twitter.

JM: One of the most underrated parts of a universal welfare state is the income-smoothing effect. Even if you pay in just as much as you take out, there’s an efficiency gain in redistributing from yourself at peak earning years to yourself when you’re sick, old, young, or unemployed.

Steven Hart (first half of KCN): Only if you suppose the utility of income is relatively flat across an individual's lifetime, which is a massive assumption.

Me (with my Citizen's Basic Income Trust hat on): Is marginal utility the same across a lifetime? For most yes, for some they'd prefer it earlier, others later, it all averages out. It's safe to assume that the marginal value of income is highest when your fixed costs take up most of our income. So smoothing income, assuming fixed costs are fixed, must increase overall utility.

SH: In theory perhaps, but in practice absolutely not. For example, the marginal value of income increases significantly when you have a family. This is not merely an issue of discounting.

JM: The whole point of a comprehensive welfare state is to redistribute to you during periods where marginal value of income increases. So you have a Child Allowance to increase your income at that point, paid during your childless years.

SH: But there is no way of determining the marginal value of income. In such a system, a bureaucrat decides for you*. Such a system *may* benefit citizens, but it is by no means a guarantee, even under a great number of simplifying assumptions.

JM: It's a safe bet that marginal value increases when you're a parent. You just said so yourself. And peak earning years don't match up with peak child rearing years. A child allowance is clearly beneficial here.

* I didn't respond to this, which is clearly nonsense. Marginal value of income just is whatever it is. No bureaucrat decides it. Any income smoothing must, by definition, increase overall marginal utility of spending.
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SH (second half of KCN): The less taxation, the more an individual has the ability to distribute income according to his or her own preferences.

Me: Citizens income is a tax rebate. It's negative taxation, not taxation. Total income the same, as the original tweet said.

SH: That's irrelevant to the critique. If it helps you, replace "taxation" with "incoming smoothing" in my Tweet. I'm saying that the same income redistributed equally throughout a lifetime is not necessarily superior to non-redistributed, even absent any consideration of incentives.

That's not a practical example. There is no thought experiment you can run to prove or disprove this. It's a simple fact that people can cope very well with sudden large increases in income (or falls in fixed costs) but can't cope so well with sudden falls in income (or increases in fixed costs).

A welfare state shouldn't flatten income too much because that would be a disincentive to working (and that would be bad for society/the economy), but just leaving people to their fates and allowing massive and increasing inequality is bad for society/the economy as well. Pitch it somewhere in the middle and you won't be far wrong.
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Anyway, it's a good argument FOR a Citizen's Income, I'll expand on this in future posts.

Project Fear, Part the Manieth?

This appeared in Facebook:

On the face of it, it seems logical. Our oil refineries are going to be clobbered on the petrol they export to the EU, at the same time as they are going to be undercut by tariff free foreign imports. This will lead to the closure of oil refineries, strike action, fuel shortages, riots, famine, pestilence and the usual End Of Life As We Know It.

However, no mention is made of the following:

All the crude oil we import is from outside the EU, although just under half is from Norway, which is quasi-EU. Just over half of this at least will become significantly cheaper. (That is assuming that the crude oil from Norway is already significantly cheaper than that from non-EU countries, which is not necessarily the case. Market economics suggest that the Norwegians would charge just slightly less than what we pay for oil from non-EU countries.) This would make it more economical to continue to refine our own fuel rather than to import it ready refined.

We import more petrol than we export and we export more than we consume domestically. (From Google: UK fuel consumption is 1.475 Bn litres a month, which translates to 1.062 M tonnes a month. UK fuel exports are 30 M tonnes a year). So it appears that 100% of those petrol exports that are going to become uncompetitive are actually imported, so the margin on the exported fuel cannot be great or the EU countries that currently import from us could simply buy direct from our suppliers and cut out the middleman.

I may be wrong about this, but this, and, by extension, the entire Yellowhammer report, looks like just another manifestation of Project Fear.

Ceteris Paribus

From here

Me: "[famers] can put up greenhouses anywhere (as long as it's not too steep). Mushrooms grow underground."

Bayard: "You still have to grow plants in something. If it was more economical to grow fruit and veg in polytunnels, everyone would be doing it already."

Well not necessarily.

The point was that dairy farmers claim to be worried about Brexit, for some reason they say milk prices will fall if they can't export it as easily, ignoring the fact that the UK might well be importing less milk and milk products as well, so it would largely cancel out and might even go in their favour.

But let's assume they are right.

The economics is this:

At present, with milk prices as they are, the most profitable use of a certain field is dairy. Putting up polytunnels to grow fruit and veg is less profitable. More income but more expenses. So the rational thing to do is dairy.

If milk prices fall sufficiently, dairy will less profitable or even loss making. At which stage, polytunnels and fruit and veg is the more profitable alternative. Probably not for Welsh hill sides used for insanely unprofitable sheep farming, but the best use for those hill sides is just let trees grow on them (or whatever grows naturally on Welsh hill sides).

Plus I'm not sure Bayard is even right. Take a train across the Netherlands and the entire countryside (the small gaps between towns) appears to be covered in polytunnels. And, despite being such a small country, the Netherlands is the second largest food exporter in the world (the article has a photo of the one single field not covered in polytunnels or surrounded by housing).

Confusing two separate issues and tbus drawing the wrong conclusion

It is generally accepted (whether entirely true or not) that

a. Energy, mobile phone, broad band and insurance companies offer new customers discounts and overcharge continuing customers. Some people waste hours every year switching to a different company; and the companies then have the added hassle of closing old and opening new accounts. This is not proper price competition and does not make the companies/the economy more efficient, it just wastes a load of time.

b. Energy companies in particular enjoy a monopoly-cartel position and overcharge generally.

Problem a. is solved by banning new customer discounts i.e. expecting companies to offer the same price to new and continuing customers. This seems fair enough to me. Whichever companies have the most competitive price/service will gain market share naturally, as it should be.

Problem b. is easily fixed with a price cap. It's not difficult to set the price of electricity, gas or water so that providers still make a reasonable return, and the original privatisation was done on this basis. The most efficient companies will still be the most profitable. I don't see how this applies to mobile phones, broadband or insurance, that is proper competition IMHO.

Sam Bowman went off on a tangent in yesterday's City AM:

Even if you’re a savvy customer who remembers to switch insurance and energy providers every year, and cancel your mobile phone contract once you’ve paid off the handset, it’s a near-certainty that you have relatives and friends who aren’t. To many people, it’s too much of a hassle to switch, and the gains are too uncertain to bother checking.

This practice seems like a rip-off, and that was the motivation behind the energy price cap proposed by Ed Miliband and implemented by the May government at the start of this year.

No, that's confusing issues a. and b, which is where he goes wrong.

As critics of the policy predicted, the energy price cap is now being ratcheted downwards, so that more and more customers will be caught in it and the price discounts that energy companies can offer will become smaller and smaller. In telecoms, Ofcom has just reached an agreement with most of the mobile operators to curb loyalty penalty pricing in mobile phone contracts.

This may sound like a good thing, but trouble with price caps and contract regulations is that customer switching is good for efficiency overall. Customer switching forces companies to compete with each other and try to find ways of doing business more cheaply. Diminishing the rewards for switching means that fewer people will be willing to shop around, which weakens the incentive these companies have to improve.

Even if domestic electricity prices were fixed at a uniform price, companies would still have every incentive to generate electricity/supply gas as cheaply and efficiently as possible.

'Contract regulations' just means no new customer discounts/loyalty penalty. This reduces the amount of entirely artificial and unnecessary switching, but there would still be the incentive to switch to a cheaper/better provider. The overall competitive pressure would focus on price/service and not on pricing/marketing gimmicks.

The current regulatory approach tries to protect non-switchers by hurting switchers. That’s a dead end, making markets affected by it sclerotic, uncompetitive, and less innovative in the long run.

Neither policy a. nor policy b. 'hurts switchers'. They are entirely neutral.

A better approach may be to make switching easier, or even entirely automatic.

Agreed, but that is complementary to policy a. If companies aren't allowed to penalise existing customers with a 'loyalty penalty', they can't be allowed to penalise them with a 'leaving penalty' (to cancel out the other company's new customer discount). Gym's stay in business with savage leaving penalties, and that is not a healthy business model.

The Law of Rent strikes again!

From the BBC:

Rising rents mean young people are less likely to move to UK cities where average salaries are higher, a report indicates. The number of young people in private rented accommodation who moved for a new job has almost halved in 20 years.

Despite the higher wages available, financial incentives for moving are lower, say researchers.

"Pay gains are being swallowed up by high housing costs," said Lindsay Judge of the Resolution Foundation. "For young people in particular, there are real advantages to moving when it comes to trying new roles and developing skills - and housing should not be a barrier that prevents them doing this."

Although unemployment has fallen, the Resolution Foundation found that rents had climbed the fastest in higher-paying areas of the UK. Private rents have risen by almost 90% in the UK's highest-paying local authority areas, while rents have increased by just over 70% among the lowest-paying local authority areas.

In 1997*, after housing costs were deducted from salaries, private renters moving from a low-paying area such as East Devon to a mid-paying area such as Bristol would have received an average financial gain of about 16%. Today, the financial gain would be a mere 1%.

I trust this is no surprise to anybody who reads this blog, this is all entirely as predicted.

* In 1997, the UK government made no-fault evictions much easier under s21 Housing Act. This was the last vestige of Georgism Lite that kept rents and prices down for most of the 20th century. Banks were suddenly falling over themselves to offer buy-to-let mortgages, knowing is would be much easier to sell the home with vacant possession if they wanted their money back in a hurry, and the rest is history...

But back in 1997, rents had not yet rebounded to their full market rate and you could still improve your net income by moving to a higher wage area. That quest is now pretty futile.

Do we benefit from low wages in other countries? Discuss!

TBH had a discussion with X (name escapes me) recently, which raises some interesting topics which we thought might be of interest. It went along the following lines:

X: "It is wrong for developing countries to subsidise their exports and dump cheap goods in developed countries. That hurts the non-subsidised businesses and their workers, as they are paying extra taxes to fund the subsidies which benefit exporters and overseas importers"

Non-contentious so far.

"This also unfair competition for businesses in developed countries, and business failures lead to unemployment. Therefore it is OK for developed countries to impose tariffs on such goods to cancel out the subsidies."

TBH, disagreeing: "Trade is always good, tariffs on trade are always bad. If we can buy cheap steel, cheap cars, short-term that is bad for our domestic steel or car makers and their workers; medium term it means we can move to producing higher value-added things instead, so overall is a win for us. Imposing tariffs does not help the people being oppressed in other countries, it just means that the benefit of the overseas subsidies goes to our government instead of to us as consumers."

In which I would agree with TBH. You can extend X's logic to any cheap imports from low wage countries, so it is clearly wrong. Who's going to make the decision whether
a) goods from a certain country are cheaper because workers are being exploited; or
b) goods from a certain country are cheaper because they are more efficient?
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But something else I have been mulling over is the widely held assumption that we benefit from low wages in developing countries because we can buy cheap stuff. The price of clothing or bog standard new cars has not increased in nominal terms for decades.

Which looks like a very good thing to me. Some go further and 'worry' about the day a few decades hence when wages and prices in e.g. the Far East have risen to Western levels.

Why is that a bad thing? When that day arrives it will be because business and workers in those countries are producing more stuff, either more of the same stuff or more value-added stuff.

So there's more stuff to go round; Westerners will be getting a smaller share of a much larger pie. Overall, people in the new developed countries will be better off (clearly) and people in the old developed countries will also be better off (however marginally).

Therefore, the conclusion must be that while we benefit from low wages in developing countries (first discussion) and shouldn't impede that with tariffs and quotas, we'll benefit even more once their wages have risen to our levels (second train of thought).

Allowing free trade* with developing countries is the main thing we can do to help them develop; once they have developed, even X's weak argument for tariffs and quotas falls away, so it's game set and match for free trade, as far as I can see.
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* "Free trade" does not mean developing countries should be forced to allow Western imperialist capitalists (mainly banks and miners), to steal assets, generally rent seek and wreck developing countries of course, quite the opposite.