tag:blogger.com,1999:blog-20356901839959698252024-03-04T20:25:52.353-08:00Economics PerspectiveAnonymoushttp://www.blogger.com/profile/03692686140237259782noreply@blogger.comBlogger16125tag:blogger.com,1999:blog-2035690183995969825.post-24119119065802750922017-11-24T03:35:00.000-08:002017-11-24T03:35:25.205-08:00Tax IncidenceEvery Chancellor likes to pull a rabbit out of their hat during the budget, and this Chancellor is no different. Like any good showman, he left his rabbit until the very end. He announced he would be abolishing stamp duty on all properties purchased by first time buyers below £300,000. This was announced as a measure to help first time buyers. It took most economists worth their salt about 10 seconds to realise that this measure would not help first time buyers, but would simply lead to higher prices, and real effect was a transfer of resources from the tax payer to home owners. Of course, the OBR (who are economists and worth their salt) had already pointed this out in their blue book accompanying the budget.<br />
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Most economists would be quick off the mark here because it is one of the first lessons taught in Econ101 that the formal incidence of a tax and the effective incidence of a tax are completely independent. The formal incidence of a tax is a question of who is legally responsible for paying a tax. The effective incidence of a tax is asking who actually ends up paying for the tax after all is said and done. Governments can change the formal incidence of a tax as much as they like, but it will have no impact on the effective incidence of a tax. <br />
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This is something that can demonstrated through one of the most common economic models, supply and demand. Let's start by thinking of the market for widgets. Suppose that the demand curve for widgets is described by the following equation: <i>p = 100-q</i>. Suppose that the supply curve is described by <i>p= 3q</i>. The price moves until the number of units consumers want to consume is the same as the number of units suppliers are willing to supply, which will be where the demand and supply curves meet. This is where <i>3q = 100-q</i>, or <i>4q = 100</i>, or <i>q=25</i>, which implies a price of <i>p=75</i>.<br />
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Now suppose that the government imposes a tax on the sale of widgets in the amount of £10 per widget. At first we will suppose that buyers are responsible for declaring their widget purchases and paying the tax. Provided we are careful about our terms, we can work out what will be the effect of this on the market for widgets. To be consistent, we will always ensure that p represents the amount of money handed over to the supplier by the purchaser. So consumers now take into account that for every unit they purchase, they will have to hand over £10 to the government. This will shift the demand curve down by exactly £10, so it becomes <i>p+10 = 100-q => p = 90-q</i>. think about it like this: whatever the price consumers hand over to the seller, <i>p</i>, they know they know they must hand over an additional 10 to the government, so wherever <i>p</i> used to appear in their demand curve, we replace it with <i>p+10</i>. So now let's find the equilibrium again, and this will be where <i>90-q = 3q</i>, which is where <i>4q=90</i>, which is where <i>q=22.5,</i> so the price handed over to the supplier is <i>p=67.5</i>. Note that this is what the supplier receives for each unit, while the buyer pays 10 more than this, so the price paid by the buyer is <i>p+10=77.5</i>. So for buyers, the price has only gone up by £2.50, while for sellers it has gone down by £7.50. Despite formally being responsible for the whole tax, buyers effectively only pay 25% of it, while the sellers pay 75%.<br />
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What would happen if the formal responsibility for paying the tax were reversed, and sellers had to report transactions and pay the tax? In that case, demand would return to its pre-tax relationship, <i>p=100-q</i>, but sellers would take account of their responsibility to hand over £10 for every transaction. So whatever the price paid, <i>p,</i> they would be aware that they would only receive <i>p-10,</i> and they would respond accordingly. So their supply curve becomes <i>p-10=3q=> p = 10+3q</i>. Once again, we can find the equilibrium in the market after the tax is imposed by finding the intersection of demand and supply: <i>100-q=10+3q => 4q=90 => q=22.5. </i>Substi<i></i>tuting this quantity into the demand curve or the post tax supply curve, we see that the transaction price must be <i>p=77.5</i>. This is the whole price paid by the consumers for each unit, but the suppliers have to hand over £10 out of this figure to the government. So the net price received by the suppliers for each unit will be £67.50. So comparing to the no-tax benchmark, the price paid by the consumers went up by £2.50, while the price received by the suppliers went down by £7.50. The consumers pay 25% of the tax and the suppliers pay 75%. The effective division of the tax is exactly the same when the sellers are formally responsible for paying as it is when the buyers are formally responsible for paying. This is what economists mean when they say that the effective incidence of a tax is independent of the formal incidence of a tax.<br />
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But we can go further than that. Why did most of the tax burden fall on the suppliers? To get the intuition here it is useful to look at supply and demand on a diagram. In the diagram below we have graphed supply and demand. The grey line shows the pre-tax equilibrium. The dashed black lines show the post tax price paid by the consumer and price received by the supplier. <br />
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The impact of the tax is that the new equilibrium must be where the price paid by the consumer is £10 more than the price received by the supplier. Effectively it drives a wedge between supply and demand. Because the supply curve is steeper than the demand curve, this wedge involves a larger price fall for the supplier than price rise for the purchaser. This is actually a general result. The more inelastic side (i.e. the side with the steeper curve) of the market will pay more of the tax. How much more of the tax they pay is in proportion to how much steeper their curve is.<br />
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In the UK housing "market", the supply curve is incredibly steep. It is almost vertical. This is the key problem in this "market" and why prices have risen so high. So although buyers are formally responsible for paying stamp duty, the effective incidence is such that virtually all of it is actually paid by the seller in the form of lower prices. If you cut stamp duty, sellers don't have to pay so much of the tax, and the means through which this happens is higher prices.<br />
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So whenever the chancellor announces a tax cut remember that the benefits don't necessarily accrue to the party officially paying the tax. They will accrue to the people who are actually paying the tax, and they won't always be obvious. One needs to think about what is being taxed and whether the buyers or the sellers are on the more inelastic side of that market.Anonymoushttp://www.blogger.com/profile/03692686140237259782noreply@blogger.com0tag:blogger.com,1999:blog-2035690183995969825.post-59508865220317317272017-09-22T03:07:00.000-07:002017-09-23T14:39:16.085-07:00Hostile Odds<!--[if !mso]>
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<br />
<div class="MsoNormal">
According to <a href="https://www.theguardian.com/uk-news/2017/sep/21/uk-banks-to-check-70m-bank-accounts-in-search-for-illegal-immigrants">The
Guardian</a>, the government, in its attempt to create a “hostile environment”
for illegal immigrants, has recruited the banks into doing immigration checks
on 70m current accounts.<span style="mso-spacerun: yes;"> </span>That is just
slightly more than the population of the UK, and <a href="http://news.bbc.co.uk/1/hi/business/7509375.stm">not everyone in the UK
actually has a Current Account</a>.<span style="mso-spacerun: yes;"> </span>I
can only assume this means the government is asking the banks to check the
immigration status of literally every current account holder in the UK!</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
In the process, according to the Guardian story, the “Home
Office expects to identify 6,000 visa overstayers, failed asylum seekers, and
foreign national offenders.”<span style="mso-spacerun: yes;"> </span>The
guardian story also informs us that “The accounts of those identified will be
closed down or frozen.”</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The Guardian story continues “Banks have been told to adopt
a default position of telling customers to take up the matter with the Home
Office if a mistake has been made, even if they provide a passport or biometric
residence permit showing they are lawfully present in Britain…</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="background: white;">“The new legislation requires
the banks to check the identity of every current account holder against a Home
Office supplied database held by an anti-fraud organisation, Cifas.</span>”<span style="mso-spacerun: yes;"> </span>So it looks like this is going to be an
exercise in matching names of current account holders to a list of potential
immigration rule violators.<span style="mso-spacerun: yes;"> </span>So if
someone who is here illegally has opened the bank account with a slightly
different spelling of their name, they will be missed and there will be a false
negative.<span style="mso-spacerun: yes;"> </span>If someone with a perfectly
legal right to be here just happens to have the same name as someone who is on
this list, there will be a false positive.<span style="mso-spacerun: yes;">
</span>That person will find their account frozen and will have to deal with
the Home Office in order to unfreeze it – an experience which by all accounts
compares favourably with banging one’s head against a wall.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Let’s run the numbers and assume that the Home Office are
correct in their estimate that there are 6,000 people here illegally who also
have current accounts. Given their recent performance <a href="https://www.theguardian.com/education/2017/aug/24/pressure-grows-for-immigration-targets-to-exclude-foreign-students">overestimating
the number of foreign students</a> who overstay their visa by over 2,000%, that
is stretching credulity.<span style="mso-spacerun: yes;"> </span>But let’s go
with that for the sake of making some estimates and crunching some numbers.<span style="mso-spacerun: yes;"> </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Let’s consider some scenarios around the success rate.<span style="mso-spacerun: yes;"> </span>Some estimates have suggested the Home Office’s
error rate could be as high as 10% (see below).<span style="mso-spacerun: yes;">
</span> </div>
<div class="MsoNormal">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEisO9gcuLLBV92rqVRFiJLBVpFa0LdlrGXvNxN-6u-d0AXg1T7jNqEbM20PXjakEJiS7SwUZOZ-wjTQnWA8e6VCqkxJbjihoHP8-wIG5Acyv8CAuAguTmISMdR9w9hucHd3gGnVObiE5g1v/s1600/tweet.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="270" data-original-width="650" height="165" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEisO9gcuLLBV92rqVRFiJLBVpFa0LdlrGXvNxN-6u-d0AXg1T7jNqEbM20PXjakEJiS7SwUZOZ-wjTQnWA8e6VCqkxJbjihoHP8-wIG5Acyv8CAuAguTmISMdR9w9hucHd3gGnVObiE5g1v/s400/tweet.png" width="400" /></a></div>
<div class="MsoNormal">
</div>
<div class="MsoNormal">
</div>
<div class="MsoNormal">
So we’ll use that as a worst case scenario.<span style="mso-spacerun: yes;"> </span>We’ll run the numbers assuming the Home
Office accuracy rate is:</div>
<br />
<ul>
<li><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";"></span></span></span>90%;</li>
<li><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";"></span></span></span>99%;</li>
<li><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";"></span></span></span>99.9%; and</li>
<li><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";"></span></span></span>99.99%.</li>
</ul>
<br />
<div class="MsoNormal">
</div>
<div class="MsoNormal">
Then we can calculate the number of false positives we would
expect given this level of accuracy, given that there are 69,994,000 current
accounts held by people with every right to be in the UK.<span style="mso-spacerun: yes;"> </span>The numbers are in the table below:</div>
<div class="MsoNormal">
<br /></div>
<table border="1" cellpadding="0" cellspacing="0" class="MsoTableGrid" style="border-collapse: collapse; border: none; mso-border-alt: solid windowtext .5pt; mso-padding-alt: 0cm 5.4pt 0cm 5.4pt; mso-yfti-tbllook: 1152;">
<tbody>
<tr style="mso-yfti-firstrow: yes; mso-yfti-irow: 0;">
<td style="border: solid windowtext 1.0pt; mso-border-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 118.8pt;" valign="top" width="158"><div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm;">
Accuracy</div>
</td>
<td style="border-left: none; border: solid windowtext 1.0pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 85.8pt;" valign="bottom" width="114"><div align="center" class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm; text-align: center;">
<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">90%</span></div>
</td>
<td style="border-left: none; border: solid windowtext 1.0pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 85.85pt;" valign="bottom" width="114"><div align="center" class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm; text-align: center;">
<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">99%</span></div>
</td>
<td style="border-left: none; border: solid windowtext 1.0pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 85.8pt;" valign="bottom" width="114"><div align="center" class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm; text-align: center;">
<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">99.90%</span></div>
</td>
<td style="border-left: none; border: solid windowtext 1.0pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 85.85pt;" valign="bottom" width="114"><div align="center" class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm; text-align: center;">
<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">99.99%</span></div>
</td>
</tr>
<tr style="mso-yfti-irow: 1;">
<td style="border-top: none; border: solid windowtext 1.0pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 118.8pt;" valign="top" width="158"><div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm;">
Error Rate</div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 85.8pt;" valign="bottom" width="114"><div align="center" class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm; text-align: center;">
<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">10.00%</span></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 85.85pt;" valign="bottom" width="114"><div align="center" class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm; text-align: center;">
<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">1.00%</span></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 85.8pt;" valign="bottom" width="114"><div align="center" class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm; text-align: center;">
<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">0.10%</span></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 85.85pt;" valign="bottom" width="114"><div align="center" class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm; text-align: center;">
<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">0.01%</span></div>
</td>
</tr>
<tr style="mso-yfti-irow: 2; mso-yfti-lastrow: yes;">
<td style="border-top: none; border: solid windowtext 1.0pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 118.8pt;" valign="top" width="158"><div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm;">
No. Of False Positives</div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 85.8pt;" valign="bottom" width="114"><div align="center" class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm; text-align: center;">
<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">6,999,400</span></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 85.85pt;" valign="bottom" width="114"><div align="center" class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm; text-align: center;">
<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">699,940</span></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 85.8pt;" valign="bottom" width="114"><div align="center" class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm; text-align: center;">
<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">69,994</span></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 85.85pt;" valign="bottom" width="114"><div align="center" class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm; text-align: center;">
<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">6,999</span></div>
</td>
</tr>
</tbody></table>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
In order to cut the number of false positives to be of the
same order of magnitude as the number of people they are hoping to catch, the
Home Office would need to be 99.99% accurate.<span style="mso-spacerun: yes;">
</span>Even then, there are about 1,000 more false positives than the number of
overstayers the Home Office expects to catch.<span style="mso-spacerun: yes;">
</span>So it would be more likely that someone whose bank account was frozen as
a result of this review had a right to be in the UK than not.<span style="mso-spacerun: yes;"> </span>Remember this is the same Home Office that
was once declared “<a href="http://www.bbc.co.uk/news/av/uk-politics-15786213/john-reid-on-home-office-not-fit-for-purpose-quote">unfit
for purpose</a>” by the minister in charge of it (who was quoting a senior
civil servant).<span style="mso-spacerun: yes;"> </span>The same Home Office
that violated a court order in deporting someone to Afghanistan and may well
have been in <a href="https://www.theguardian.com/uk-news/2017/sep/14/home-secretary-ignores-court-order-sends-asylum-seeker-kabul-samim-bigzad">contempt
of court</a>.<span style="mso-spacerun: yes;"> </span>The same Home Office that
“accidentally” <a href="https://www.theguardian.com/politics/2017/aug/23/home-office-apologises-for-letters-threatening-to-deport-eu-nationals">sent
letters to over a hundred European citizens</a> exercising their treaty rights
living in the UK legally telling them they should pack their bags or face
arrest.<span style="mso-spacerun: yes;"> </span>To suggest that this Home Office
can hit that target level of accuracy is patently absurd.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The next step is to make some assumptions about how quickly
civil servants can clear up the confusion that results from false positives and
set them right.<span style="mso-spacerun: yes;"> </span>We will assume a
somewhat optimistic 5 person hours per false positive to clear it all up.<span style="mso-spacerun: yes;"> </span>Given some of the stories linked to above,
this may be absurdly optimistic.<span style="mso-spacerun: yes;"> </span>Remember
that is just the time of the civil servants at the Home Office, it is not
taking into account the time and effort of the people caught up in this
dragnet, neither is it taking into account the time of bank staff.<span style="mso-spacerun: yes;"> </span>We will further assume 500 civil servants are
dedicated to this task and the cost of civil servant time to the tax payer is £24
per hour as this is the figure used to turn down Freedom of Information
requests on the grounds they would cost too much.<span style="mso-spacerun: yes;"> </span>On the assumption that these people work 8
hour days and 260 days per year, we can work out how many days and years it
would take to clear all the false positives as well.<span style="mso-spacerun: yes;"> </span>Those calculations are in the next table:</div>
<div class="MsoNormal">
<br /></div>
<table border="1" cellpadding="0" cellspacing="0" class="MsoTableGrid" style="border-collapse: collapse; border: none; mso-border-alt: solid windowtext .5pt; mso-padding-alt: 0cm 5.4pt 0cm 5.4pt; mso-table-layout-alt: fixed; mso-yfti-tbllook: 1184;">
<tbody>
<tr style="mso-yfti-firstrow: yes; mso-yfti-irow: 0;">
<td style="border: solid windowtext 1.0pt; mso-border-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 168.45pt;" valign="top" width="225"><div align="right" class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm; text-align: right;">
Accuracy</div>
</td>
<td style="border-left: none; border: solid windowtext 1.0pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 78.7pt;" valign="bottom" width="105"><div align="center" class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm; text-align: center;">
<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">90%</span></div>
</td>
<td style="border-left: none; border: solid windowtext 1.0pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 71.65pt;" valign="bottom" width="96"><div align="center" class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm; text-align: center;">
<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">99%</span></div>
</td>
<td style="border-left: none; border: solid windowtext 1.0pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 71.65pt;" valign="bottom" width="96"><div align="center" class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm; text-align: center;">
<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">99.90%</span></div>
</td>
<td style="border-left: none; border: solid windowtext 1.0pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 71.65pt;" valign="bottom" width="96"><div align="center" class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm; text-align: center;">
<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">99.99%</span></div>
</td>
</tr>
<tr style="mso-yfti-irow: 1;">
<td style="border-top: none; border: solid windowtext 1.0pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 168.45pt;" valign="bottom" width="225"><div align="right" class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm; text-align: right;">
<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">Person
Hours to clear false positives</span></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 78.7pt;" width="105"><div align="center" class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm; text-align: center;">
<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">34,997,000</span></div>
</td>
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<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">3,499,700</span></div>
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<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">349,970</span></div>
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<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">34,997</span></div>
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<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">Hours
to clear</span></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 78.7pt;" width="105"><div align="center" class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm; text-align: center;">
<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">69,994</span></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 71.65pt;" width="96"><div align="center" class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm; text-align: center;">
<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">6,999</span></div>
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<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 71.65pt;" width="96"><div align="center" class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm; text-align: center;">
<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">700</span></div>
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<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 71.65pt;" width="96"><div align="center" class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm; text-align: center;">
<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">70</span></div>
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<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">Days
to clear</span></div>
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<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">8,749</span></div>
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<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 71.65pt;" width="96"><div align="center" class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm; text-align: center;">
<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">875</span></div>
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<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 71.65pt;" width="96"><div align="center" class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm; text-align: center;">
<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">87</span></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 71.65pt;" width="96"><div align="center" class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm; text-align: center;">
<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">9</span></div>
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<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">Years
to clear</span></div>
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<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 78.7pt;" width="105"><div align="center" class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm; text-align: center;">
<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">34</span></div>
</td>
<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 71.65pt;" width="96"><div align="center" class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm; text-align: center;">
<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">3</span></div>
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<td style="border-bottom: solid windowtext 1.0pt; border-left: none; border-right: solid windowtext 1.0pt; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt 0cm 5.4pt; width: 71.65pt;" width="96"><div align="center" class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm; text-align: center;">
<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">0</span></div>
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<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">0</span></div>
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<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">Cost</span></div>
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<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">£839,928,000</span></div>
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<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">£83,992,800</span></div>
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<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">£8,399,280</span></div>
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<span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">£839,928</span></div>
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<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Even on the optimistic assumption that the Home Office cuts
the proportion of false positives to 10% of what it has been in the past, it
would still take around 3 years to process all of the false positives coming
out of this exercise.<span style="mso-spacerun: yes;"> </span>That is a very
long time for some people to be spending in limbo, with no access to their bank
accounts, unable to pay the rent, mortgage, unable to pay the gas bill, unable
to pay for groceries. <span style="mso-spacerun: yes;"> </span>All to try and
catch a measly 6,000 or so visa over stayers. </div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The Home Office might be able to catch a few more illegal
immigrants if they expand their search parameters and look for common
mis-spellings of the names that are on their list or other variations.<span style="mso-spacerun: yes;"> </span>This would reduce the number of false
negatives, but it would increase the number of false positives, leaving more
innocent people with no means of paying the rent or mortgage or gas bill.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Yes, I’ve had to make a lot of assumptions in making these
calculations.<span style="mso-spacerun: yes;"> However, at every point, the assumptions I've made are fairly reasonable. </span>The Home Office could cut
the time it takes to clear the number of false positives by dedicating more
civil servants to the task.<span style="mso-spacerun: yes;"> </span>However this
would not cut the total number of hours taken and would not cut the cost of
dealing with the backlog, which could run as high as £840m.<span style="mso-spacerun: yes;"> </span>Neither would it do much to cut the costs,
panic and trauma imposed on thousands, maybe millions of perfectly innocent
people.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The numbers work out this way, with so many more false
positives than actual illegal immigrants caught because the number of illegal
immigrants is just so small (even by the Home Office’s wildly inflated
estimates) relative to the size of the UK population as a whole.<span style="mso-spacerun: yes;"> </span>Yet the political hysteria surrounding this
issue has reached fevered proportions.<span style="mso-spacerun: yes;">
</span>The words of Sir Humphrey have never been so apt: “If you’re going to do
this damned silly thing, don’t do it in this damned silly way.”<a href="https://www.blogger.com/null" name="_GoBack"></a></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Indeed, these numbers and costs are so dire, that it is
amazing to think that anyone could have thought this is a good idea.<span style="mso-spacerun: yes;"> </span>Yet this is happening as a result of an Act
of Parliament that was passed with full parliamentary scrutiny in both
Houses.<span style="mso-spacerun: yes;"> </span>Just imagine what these
ministers and civil servants would get up to if a law were passed giving them
the authority to make their own laws with the full force of an Act of
Parliament with no Parliamentary scrutiny whatsoever!</div>
Anonymoushttp://www.blogger.com/profile/03692686140237259782noreply@blogger.com0tag:blogger.com,1999:blog-2035690183995969825.post-82014727255035447002016-07-20T02:40:00.002-07:002016-07-20T02:42:57.875-07:00Is Contracting Out Tantamount to Privatisation?<!--[if gte mso 9]><xml>
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<br />
<div class="MsoNormal">
“Owen Smith wanted to privatise the NHS”.<span style="mso-spacerun: yes;"> </span>Expect to hear a lot more statements like
this over the coming months.<span style="mso-spacerun: yes;"> </span>The basis
for this claim as far as I could tell from the interview on the Today programme
was that he had in the past supported the idea that the NHS does not provide
some relatively routine surgery itself, but contracts out to private firms for common
knee and hip operations.<span style="mso-spacerun: yes;"> </span>There was no
suggestion, even from Mr. Smith’s detractors that patients would have to pay
for these operations, rather the money would come from the NHS.<span style="mso-spacerun: yes;"> </span>The implicit definition of privatisation here
is truly ludicrous.<span style="mso-spacerun: yes;"> </span>The involvement of
the private sector in almost anything the NHS does is being defined as
privatisation.<span style="mso-spacerun: yes;"> </span>What follows is a bit of <i style="mso-bidi-font-style: normal;">reductio ad absurdum</i>, but very little <i style="mso-bidi-font-style: normal;">reductio</i> is required before <i style="mso-bidi-font-style: normal;">absurdum</i> is reached.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
If purchasing goods and services from private suppliers is
to be thought of as privatisation of the NHS, then the NHS has always been private.<span style="mso-spacerun: yes;"> </span>There are some things the NHS has always
purchased from the market.<span style="mso-spacerun: yes;"> </span>The scalpel
used by a surgeon performing an operation was not designed and manufactured by
the NHS.<span style="mso-spacerun: yes;"> </span>The NHS did not even mine the
iron ore or smelt the steel itself.<span style="mso-spacerun: yes;"> </span>All
stages of production of the scalpel from design to the extraction of the
necessary raw materials were performed by the private sector.<span style="mso-spacerun: yes;"> </span>The NHS simply purchased the scalpel in the market.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Under the definition of “privatisation” used by Mr. Smith’s
detractors a truly public NHS would need to have (among other things):</div>
<br />
<ul>
<li>Their own iron mines to extract iron ore for which
would be turned into steel in NHS steel works for making scalpels and other
surgical equipment in NHS factories;</li>
<li>Their own brick-making facilities to supply the
bricks with which hospitals and doctors’ surgeries are built; and</li>
<li>Their own power plants to produce all the
electricity used in NHS hospitals and doctors’ surgeries.</li>
</ul>
Since the NHS has never had its own steel works or power
plants it has always been a private sector entity.<span style="mso-spacerun: yes;"> </span>This is clearly ludicrous.
<br />
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The reason I find these cries of privatisation so
disagreeable is that they are obscuring the conversation we need to have about
the NHS.<span style="mso-spacerun: yes;"> </span>The NHS is a wonderful
institution.<span style="mso-spacerun: yes;"> </span>For a nation to provide
healthcare to all its residents free at the point of delivery so that everyone,
rich or poor, receives the same high quality healthcare is little short of a
modern day miracle.<span style="mso-spacerun: yes;"> </span>But it also becomes
exceptionally important that this medical care is provided in the most cost
effective way possible.<span style="mso-spacerun: yes;"> </span>This is obvious
to anyone who understands the nature of opportunity cost.<span style="mso-spacerun: yes;"> </span>If more money than is strictly necessary is
spent on routine knee and hip operations there is less money to spend on e.g. life-saving
cancer treatments.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
It might be objected that there is a clear line between the
frontline provision of healthcare which should be undertaken by the NHS, and
the ancillary support to that frontline for which the NHS should be free to
contract out.<span style="mso-spacerun: yes;"> </span>However this would be a
line that would blur quickly.<span style="mso-spacerun: yes;"> </span>In many
respects, the surgeon’s scalpel is closer to the frontline of healthcare
provision than the surgeon herself.<span style="mso-spacerun: yes;"> </span>What
about pharmacy services? Must Boots be closed down? Moreover even if such a
definite line could be drawn, it is unclear why everything on the frontline
side of such a line should be provided by the NHS directly with no contracting
out.<span style="mso-spacerun: yes;"> </span>To insist on this with no reason
would seem quite dogmatic.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The NHS needs to think about what activities it is best
placed to perform itself and where it can achieve the same or even better
results at a lower cost by contracting out to private providers.<span style="mso-spacerun: yes;"> </span>The key issues in making that decision should
be:</div>
<br />
<ul>
<li>Will contracting out actually save money?</li>
<li>Are there a sufficient number of potential
suppliers that there will be:</li>
</ul>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 72.0pt; mso-add-space: auto; mso-list: l1 level2 lfo2; text-indent: -18.0pt;">
<span style="font-family: "courier new"; mso-fareast-font-family: "Courier New";"><span style="mso-list: Ignore;">o<span style="font: 7.0pt "Times New Roman";">
</span></span></span>Competition to supply the service in the first
place; and</div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 72.0pt; mso-add-space: auto; mso-list: l1 level2 lfo2; text-indent: -18.0pt;">
<span style="font-family: "courier new"; mso-fareast-font-family: "Courier New";"><span style="mso-list: Ignore;">o<span style="font: 7.0pt "Times New Roman";">
</span></span></span>Someone we can switch to if we are unhappy with
the services provided by the initial contractor.</div>
<ul>
<li><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";"></span></span></span>Do we have the negotiating strength to ensure we
get a good deal (clearly this is related to the point above, but there might be
other issues too)?</li>
</ul>
<ul>
<li><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";"></span></span></span>Is quality of service easy to measure so as to ensure
providers can be held to account?</li>
</ul>
<ul>
<li><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";"></span></span></span>Might any quality of service targets be subject
of “gaming” by a private provider?</li>
</ul>
<ul>
<li><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";"></span></span></span>Can the “soft incentives” provided within the
NHS do a better job of ensuring quality than any “hard incentives” that might
be offered to private providers (e.g. the NHS <i style="mso-bidi-font-style: normal;">esprit de corps</i>).</li>
</ul>
<br />
<div class="MsoNormal">
The list above is by no means an exhaustive list, and there
may well be numerous other factors to consider.<span style="mso-spacerun: yes;">
</span>These are just the first ones that came to mind.<span style="mso-spacerun: yes;"> </span>We also need to bear in mind that for various
services as medical technology changes and the NHS’s ability to write complex contracts
and negotiating strength change, the answer to whether a service is best
provided in house or contracted out may well change too over time.<span style="mso-spacerun: yes;"> </span>This has two implications:</div>
<br />
<ul>
<li>To decide to contract out a service now is not necessarily
to say it was wrong to provide it directly in the past.</li>
<li>If it now makes sense to contract out, we need
to consider whether this will remain the case in the future and whether the NHS
might lose the capacity to provide these services in the future as a result of
contracting out now.</li>
</ul>
<br />
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
I don’t yet know whether I think it would be a good idea or
a bad idea for the NHS to contract out for the provision of some routine
operations.<span style="mso-spacerun: yes;"> </span>I do know the criteria I
would use to judge whether it would be a good idea, I just haven’t had the time
to research and judge which side of these criteria routine operations fall
on.<span style="mso-spacerun: yes;"> </span>My prior is that I would be rather sceptical
as to whether sufficiently reliable performance measures could be found which
would be difficult to game so that a private provider can be held to
account.<span style="mso-spacerun: yes;"> </span>But it is something I could be
persuaded about. </div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
What I do know is that this is the conversation we should be
having.<span style="mso-spacerun: yes;"> </span>I also know that this
conversation is obscured by one side simply shouting that the other is seeking
to privatise the NHS by stealth and the other side shouting back that they are
not.<span style="mso-spacerun: yes;"> </span>If we want to continue with an NHS
that provides high quality healthcare to all British residents free at the
point of delivery, then we have to make sensible informed decisions about that
Health service, and what it does itself and where it contracts out.<span style="mso-spacerun: yes;"> </span>If you want to see what the impact of
sloganeering is on our capacity to make those informed decisions, just look at
what happened on 23rd June.</div>
Anonymoushttp://www.blogger.com/profile/03692686140237259782noreply@blogger.com0tag:blogger.com,1999:blog-2035690183995969825.post-59120518249959180092016-06-14T03:07:00.003-07:002016-06-14T03:10:35.329-07:00Brexiteers and RiskHere's a quick post about a <a href="http://www.cityam.com/242458/putting-his-money-where-his-mouth-is-nigel-farage-just-put-1000-on-brexit-" target="_blank">story </a>that caught my eye. Apparently Nigel Farage has placed a £1,000 bet on Britain voting to leave the European Union. Let's assume that Nigel Farage wants the UK to leave the EU, then this tells us something about the man and his attitude to risk.<br />
<br />
Suppose I offered you the following two options. Option 1: I toss a fair coin, if it comes up Heads, you pay me £10,000; but if it comes up Tails, I pay you £11,000. Option 2, I just give you £450. Most people, if they are honest, would probably choose option 2. But on average, Option 1 is worth £500. If you are honest with yourself and choose option 2, then you are risk averse.<br />
<br />
Economists usually assume that individual agents are risk averse. In other words we don't like risk, and, where possible, we would pay someone else to take on our risks for us. That's why there are companies that sell insurance. Insurance policies pay out sums of money in states of the world where certain events have happened, such as our house being robbed, or our car being damaged in an accident. In that way, betting markets, which bet on events happening or not happening are actually a lot like insurance policies.<br />
<br />
So how would a risk averse individual approach betting on the EU referendum given that they have a preference the result should go one way or the other. If someone really wants to see the UK vote to leave the EU, they should actually bet on the UK voting to stay in. That way, they narrow the set of possible outcomes in terms of how happy they are at the result. Their elation at Britain voting to leave would be a little muted by having lost a bit of money, but their disappointment at Britain voting to stay would be compensated by having won some money.<br />
<br />
For die hard proponents of either remain or leave, it may well be the case that even bets of £1,000 don't provide stakes high enough to provide full insurance (ensuring they are just as happy in either event), but they must be able to use betting markets to provide some insurance.<br />
<br />
So what does it tell us about an individual if they bet £1,000 on their preferred outcome, thus widening the outcomes and exposing themselves to more risk. It could be that they perceive the odds are very favourable, and so they take on more risk for what they perceive as a much higher expected level of wealth. However an individual should be aware of and correct for their own optimism bias.<br />
<br />
The other possibility, and this seems somewhat more likely, is that they are not risk averse as most people are believed to be, but risk loving. They enjoy risk and the shot of adrenaline they get as they wait to see if their horse crosses the line first. The wider the risk, the greater the adrenaline hit and the more fun it all seems to be!<br />
<br />
I'll be the first to admit that people like this can be fun to hang around, but I just have one more question for you: How much of your money are you willing to trust them with? Because a vote for Brexit is a vote to trust some highly risk loving people with all of our money and all of our futures for generations to come.Anonymoushttp://www.blogger.com/profile/03692686140237259782noreply@blogger.com0tag:blogger.com,1999:blog-2035690183995969825.post-22725427606165871362016-04-28T06:27:00.000-07:002016-04-28T06:27:51.249-07:00A Brexit Thought Experiment...<!--[if gte mso 9]><xml>
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Let me introduce Nigel.<span style="mso-spacerun: yes;">
</span>Nigel is a very wealthy family man who lives in a very wealthy region of
the country.<span style="mso-spacerun: yes;"> </span>He is in fact the 5th
wealthiest man in the country.<span style="mso-spacerun: yes;"> He's rather proud of this and mentions it quite a lot.</span></div>
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One day, Nigel is looking through his monthly expenditures
and wondering where he can make some savings.<span style="mso-spacerun: yes;">
</span>Although he is very wealthy, this is a prudent thing to be doing.<span style="mso-spacerun: yes;"> </span>After all, as his mother always said: “look
after the pennies, and the pounds will look after themselves.”<span style="mso-spacerun: yes;"> </span>Looking through his expenses, Nigel spots
that family membership of his golf club looks a bit high.<span style="mso-spacerun: yes;"> </span>He pauses to consider this fact.<span style="mso-spacerun: yes;"> </span>He doesn’t actually much like the officials
who run the golf club.<span style="mso-spacerun: yes;"> </span>They have a habit
of being a bit officious and petty in enforcing the club's rules.<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span>Is this club membership really worth the
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Nigel broaches the idea of resigning their family membership
with his wife and children over dinner that evening.<span style="mso-spacerun: yes;"> </span>To his utter amazement, they look at him as
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<br />
They point out that the club's facilities are brilliant. They go there and have a great time every week. Furthermore, Nigel uses it very effectively to network with clients and potential clients. His family point out that the commission he earns on business won at the club more than covers the cost of membership.<br />
<br /></div>
Nigel tries to calmly rebut all their points.<br />
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Nigel’s family seem strangely skeptical about this argument.<span style="mso-spacerun: yes;"> </span>How will they get access to the facilities if
they are not members.<span style="mso-spacerun: yes;"> </span>There is the
possibility for non members to use the facilities - for a daily fee.<span style="mso-spacerun: yes;"> </span>But the daily fee is large enough that, given
the number of times in a year they visit the club, they’d be better off just
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abide by all the niggling little club rules when they are at the club.</div>
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Nigel is absolutely amazed to hear this rebuttal.<span style="mso-spacerun: yes;"> </span>Don’t his family realise how business
works.<span style="mso-spacerun: yes;"> </span>Once he is no longer a member,
he’ll be able to negotiate his own special rate.<span style="mso-spacerun: yes;"> </span>After all, he’s the 5th wealthiest man in the
country, the golf club will want his business, and will bend rules in order to
get it.<span style="mso-spacerun: yes;"> </span>So he’ll be able to negotiate
terms that wouldn’t necessarily be available to others.</div>
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<br />
His family are still sceptical.<span style="mso-spacerun: yes;"> </span>Will they want our business that much they
ask?<span style="mso-spacerun: yes;"> </span>They might be a bit hesitant to
give us special terms, wouldn’t they think it was dangerous to set that kind of a
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At this point Nigel gets frustrated and and a bit angry: "of course they won’t mind about setting the precedent!" he exclaims.<span style="mso-spacerun: yes;"> </span>Afterall, we buy a hell of a lot more from
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At this point, his family look at each other and just say
“yes dear”.<span style="mso-spacerun: yes;"> </span>They know from bitter
experience that it is better not to argue the point when Nigel has become this
animated. Besides this vocal argument is happening inside the club's restaurant, and people are starting to stare. It is all a bit embarrassing.</div>
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<br />
If you are reading and are a British citizen and a member of
a golf club or tennis club, or even a tiddlywinks club, then I implore you:
before 23rd June, try this:<span style="mso-spacerun: yes;"> </span><br />
<ul>
<li>Go to your
club, tell them you are resigning your membership, but insist to them that this
means you will still have every right to continue using the club’s facilities.<span style="mso-spacerun: yes;"> </span> </li>
<li>If they put up a fight, try to negotiate your
own special rate.<span style="mso-spacerun: yes;"> </span> </li>
<li>See how far you get… </li>
</ul>
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<br />
<br />
<br />Anonymoushttp://www.blogger.com/profile/03692686140237259782noreply@blogger.com1tag:blogger.com,1999:blog-2035690183995969825.post-25066106368958377392015-09-03T08:58:00.001-07:002015-09-04T01:06:59.116-07:00Bayes' Rule and Political Inference<!--[if !mso]>
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<div class="MsoNormal">
Consider a question such as: Would politician A be a good
leader or not?<span style="mso-spacerun: yes;"> </span>Now consider some
information that might arrive that might inform our answer to that question in
the form of the recommendation of an opinion former, maybe a newspaper makes a
decision as to whether to endorse A or not.</div>
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Suppose an individual’s prior belief that A is a good leader
is <span style="font-family: "Courier New",Courier,monospace;">p<span style="font-size: 12pt; position: relative; top: 3pt;"></span></span><span style="mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: minor-fareast;">, and their prior
belief that the newspaper endorses a politician who is a good leader is <span style="font-family: "Courier New",Courier,monospace;">q</span></span><span style="font-family: "Garamond","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-size: 11.0pt; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin; mso-text-raise: -3.0pt; position: relative; top: 3.0pt;"></span><span style="mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: minor-fareast;">.<span style="mso-spacerun: yes;"> </span>Once the news arrives, the newspaper will
either endorse A or not.<span style="mso-spacerun: yes;"> </span>If they do not
endorse A, then the individual’s posterior probability that A is a good leader
will be:</span></div>
<div class="MsoNormal" style="text-align: center;">
<span style="font-family: "Garamond","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-size: 11.0pt; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;"><span style="font-family: "Courier New", Courier, monospace;">p'= p(1-q)/[p(1-q)+q(1-p)]</span></span><span style="mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: minor-fareast;"></span></div>
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<span style="mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: minor-fareast;">But the posterior belief about the
accuracy of the newspaper’s endorsements will also have changed, and will
indeed be the complement of the probability above:</span></div>
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<span style="font-family: "Garamond","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-size: 11.0pt; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;"><span style="font-family: "Courier New", Courier, monospace;">q'= q(1-p)/[p(1-q)+q(1-p)]</span></span><span style="mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: minor-fareast;"></span></div>
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<span style="mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: minor-fareast;">Afterall, once the newspaper does not
endorse A, either A is not a good leader or the newspaper does not make good
endorsements.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<span style="mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: minor-fareast;">Suppose that the newspaper is a source
that we would normally trust reasonably well, <span style="font-family: "Courier New", Courier, monospace;">q=0.75</span></span><span style="font-family: "Garamond","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-size: 11.0pt; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin; mso-text-raise: -3.0pt; position: relative; top: 3.0pt;"></span><span style="mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: minor-fareast;">.<span style="mso-spacerun: yes;"> </span>It might, for example, be The Economist. But
suppose that we are convinced on a level approaching religious fervour that
politician A would be a good leader, and <span style="font-family: "Courier New", Courier, monospace;">p=0.99</span></span><span style="font-family: "Garamond","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-size: 11.0pt; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin; mso-text-raise: -3.0pt; position: relative; top: 3.0pt;"></span><span style="mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: minor-fareast;">.<span style="mso-spacerun: yes;"> </span>Then as a result of the newspaper’s lack of
endorsement for A, a bit of doubt will creep in, and <span style="font-family: "Courier New", Courier, monospace;">p'=0.97</span></span><span style="font-family: "Garamond","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-size: 11.0pt; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin; mso-text-raise: -3.0pt; position: relative; top: 3.0pt;"></span><span style="mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: minor-fareast;">, but by far the biggest
movement is in the probability that the newspaper endorses good candidates and
doesn’t endorse bad ones as <span style="font-family: "Courier New",Courier,monospace;">q'=0.03</span></span><span style="font-family: "Garamond","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-size: 11.0pt; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin; mso-text-raise: -3.0pt; position: relative; top: 3.0pt;"></span><span style="mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: minor-fareast;">.</span></div>
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<span style="mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: minor-fareast;">What if the newspaper endorses the
politician?<span style="mso-spacerun: yes;"> </span>Then the posterior
probabilities in this case will be: </span></div>
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<span style="font-family: "Garamond","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-size: 11.0pt; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;"></span><span style="mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: minor-fareast;"></span></div>
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<span style="mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: minor-fareast;">Similar results obtain if the individual
detests the politician in question, and believes, with semi-religious fervour,
that they are not a good leader.<span style="mso-spacerun: yes;"> </span>Suppose
that <span style="font-family: "Courier New",Courier,monospace;">q=0.75</span></span><span style="font-family: "Courier New",Courier,monospace;"><span style="font-size: 12pt; position: relative; top: 3pt;"></span></span><span style="mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: minor-fareast;">, and <span style="font-family: "Courier New",Courier,monospace;">p=0.01</span></span><span style="font-family: "Garamond","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-size: 11.0pt; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin; mso-text-raise: -3.0pt; position: relative; top: 3.0pt;"></span><span style="mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: minor-fareast;">, and the newspaper
endorses the politician.<span style="mso-spacerun: yes;"> </span>Then the
posterior probabilities will be <span style="font-family: "Courier New",Courier,monospace;">p''= q''= 0.03<span style="font-family: Times,"Times New Roman",serif;">.<span style="font-family: inherit;"></span></span></span></span><span style="font-family: "Garamond","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-size: 11.0pt; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin; mso-text-raise: -3.0pt; position: relative; top: 3.0pt;"></span><span style="mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: minor-fareast;"></span><span style="font-family: "Courier New",Courier,monospace;"></span><span style="mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: minor-fareast;"></span> So, once again, by far the biggest update from the news of the recommendation is on the reliability of the recommender, rather than the subject of the recommendation.</div>
<span style="mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: minor-fareast;"></span><br />
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<span style="mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: minor-fareast;">The lesson?<span style="mso-spacerun: yes;"> </span>When a group of people are absolutely
convinced that a politician is the right/wrong person to lead, endorsements, or
failures to endorse will be treated more as evidence of the accuracy of the person
giving the endorsements rather than as evidence about the potential leader in
question. This offers some explanation as to why "marmite politicians" people who are either really liked or really hated, are able to maintain their core support in the face of such ferocious attacks as they frequently receive. To their supporters, the attacks contain more information about the attackers than about their target. To their detractors, any defence of them contains more information about the defenders than about the subject of the defence.</span></div>
Anonymoushttp://www.blogger.com/profile/03692686140237259782noreply@blogger.com0tag:blogger.com,1999:blog-2035690183995969825.post-66741273970435638522015-05-29T04:54:00.000-07:002015-05-29T04:57:06.754-07:00Can Tax Avoidance Save Housing Associations From "Right to Buy"?<!--[if !mso]>
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So the Conservatives are pressing ahead with their plans to
extend the right to buy to tenants of Housing Associations.<span style="mso-spacerun: yes;"> </span>There is almost unanimous agreement among everyone
who knows anything about Housing policy or even just basic economics, that this
is a monumentally bad idea.<span style="mso-spacerun: yes;"> </span>The right to
buy your council house was part of what led local councils to stop building
council houses.</div>
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<br /></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjTkwU9E9E2zczC5YMJUmqlCn23P-GMOQasmWYgoVnWlQ-B7NurIXS2OoUnQEJSrHREmjE8ve52XsH0cQ9Ya3EnNKC1IM03SmmeI21q5wcL8MUnm9zOe8rhivqOropbMEpxRvfowp0Q2-AM/s1600/Councils.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="260" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjTkwU9E9E2zczC5YMJUmqlCn23P-GMOQasmWYgoVnWlQ-B7NurIXS2OoUnQEJSrHREmjE8ve52XsH0cQ9Ya3EnNKC1IM03SmmeI21q5wcL8MUnm9zOe8rhivqOropbMEpxRvfowp0Q2-AM/s400/Councils.png" width="400" /></a></div>
<div class="MsoNormal">
<span style="mso-fareast-language: EN-GB; mso-no-proof: yes;"><br /></span></div>
<div class="MsoNormal">
With the resultant drop off in the overall UK housing supply
that has led to the dramatic increase in prices with all the consequences I
have written about elsewhere.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Essentially, the Right to Buy is a tax on Housing
Associations, raiding their assets and transferring them, at a hefty discount,
to the most privileged social housing tenants.<span style="mso-spacerun: yes;">
</span>Others have already written eloquently about how Housing Associations
fund their home building activities by borrowing against their existing asset
base (see <a href="http://www.ft.com/cms/s/0/14815674-047d-11e5-95ad-00144feabdc0.html?siteedition=uk#axzz3bWRejdRL" target="_blank">Martin Wolf in the FT </a>in particular).<span style="mso-spacerun: yes;">
</span>If that asset base is now subject to state confiscation, it will not
provide banks with sufficient surety against the loans they need to fund house
building.<span style="mso-spacerun: yes;"> </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
State confiscation of this sort is essentially little different
from a tax.<span style="mso-spacerun: yes;"> </span>Let’s not dwell too long on
the absurdity of a Conservative government, which purportedly believes in the “Big
Society”, having found a way to tax charities, and simply ask a different
question.<span style="mso-spacerun: yes;"> </span>Who has been particularly good
at avoiding tax, and is there anything that Housing Associations might be able
to learn from them?</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The essential point here is that the “Right to Buy” will
never to extended to the tenants of private landlords.<span style="mso-spacerun: yes;"> </span>So Housing Associations should find some way
to make sure that their tenants are not actually, on paper, the tenants of the Housing
Association, but the tenants of some private landlord.<span style="mso-spacerun: yes;"> </span>The same tenants should still be paying the
same rent to live in the same properties, but the assets themselves would not
be liable to seizure.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
One way to do this would be to transfer all the houses owned
by the Housing Associations to some private company.<span style="mso-spacerun: yes;"> </span>The Housing Association would then lease the
properties from this company and sub-let them to their tenants.<span style="mso-spacerun: yes;"> All of these rental agreements would, of course be happening at sub-market rents. </span>Right to Buy would not then apply as the
Housing Association cannot sell to the tenant what they do not own.<span style="mso-spacerun: yes;"> </span>The downside of this solution would of course
be that the Housing Association would not own the properties and so would not
be able to borrow against them in order to build more homes - though this could
be done by the entity into which ownership of the homes was transferred.<span style="mso-spacerun: yes;"> </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Of course, elaborate legal arrangements would be needed
between the Housing Association and the firm that owns the houses.<span style="mso-spacerun: yes;"> </span>Ideally the Housing Association would own all
of the shares in the house owning firm, but this might make things a bit
legally tricky in claiming that the Housing Association does not own the house.
<span style="mso-spacerun: yes;"> </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
One solution might be to turn the<span style="mso-spacerun: yes;"> </span>Housing Association itself into a private
company, which owns houses and rents them out, nominally for a profit, they just
agree not to make a profit.<span style="mso-spacerun: yes;"> </span>The loss of
charitable status might lead to an increase in costs because of taxes they
would now be liable for, but this would be a small price to pay for securing
the assets.<span style="mso-spacerun: yes;"> </span>This solution might present
legal problems because of the nominal duty of a management board of a private
company to make profits for their shareholders.<span style="mso-spacerun: yes;">
</span>Some structure would have to be constructed where the firm was
effectively owner-managed.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
My purpose here is not to suggest the precise legal
structure through which Housing Associations might protect their assets from “Right
to Buy”, I’m an economist, not a lawyer dammit!<span style="mso-spacerun: yes;">
</span>I merely wish to suggest that such an arrangement should be
possible.<span style="mso-spacerun: yes;"> </span>Afterall, since the “Right to
Buy” is effectively an asset tax, it should be as liable to tax avoidance as
any other tax.<span style="mso-spacerun: yes;"> </span>Maybe that army of lawyers
and accountants employed by large multinationals to avoid taxes could be
directed towards some socially useful activity in helping Housing Associations
to re-jig their legal structure to avoid the “Right to Buy”.</div>
Anonymoushttp://www.blogger.com/profile/03692686140237259782noreply@blogger.com0tag:blogger.com,1999:blog-2035690183995969825.post-17905300088804937582014-05-08T08:06:00.003-07:002014-05-10T09:59:55.132-07:00To Control Letting Fees or Not To Control Letting Fees ... Really Isn't the Question<!--[if gte mso 9]><xml>
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The coalition has frequently trumpeted their “help to buy”
policy where the government guarantees the mortgage of someone buying a new
home.<span style="mso-spacerun: yes;"> </span>Some fairly basic economic
analysis will show you that all it really does is to push up prices and benefit
the people who already own homes.<span style="mso-spacerun: yes;"> </span>See my
analysis <a href="http://econspective.blogspot.co.uk/2012/06/housing.html" target="_blank">here</a>.<span style="mso-spacerun: yes;"> </span>Now Labour have proposed
some housing market reforms, claiming that they will help Generation Rent, but
some relatively simple analysis shows that once again, this will only help home
owners, in this case landlords.</div>
<div class="MsoNormal">
<br />
The policy in question involves banning letting agent
fees.<span style="mso-spacerun: yes;"> </span>First of all, let’s look at the
scale of the problem.<span style="mso-spacerun: yes;"> </span>When renewing a
lease (and maybe changing one or two terms in it), or getting a new lease,
estate agents will charge the tenants for things like changing the contract, or
credit reference agency checks.<span style="mso-spacerun: yes;"> </span>Labour’s
research (reported <a href="http://old.lettingagenttoday.co.uk/news_features/Labour-pledges-to-crack-down-on-letting-agent-fees-if-elected">here</a>)
suggests that these fees average £902 across the country and £1,700 in London.<span style="mso-spacerun: yes;"> </span>This may sound like a lot, but compared to
the average cost of renting, is it?</div>
<div class="MsoNormal">
<br />
Let’s take a somewhat unscientific approach to gauge the
scale of this problem by looking at the rental prices of some 3 bedroom
properties. <span style="mso-spacerun: yes;"> </span>In order to do this, I am
using Rightmove’s ability to look at properties on a map and selecting a
property at random on the outskirts of a city.<span style="mso-spacerun: yes;">
</span>On the outskirts here means just inside the Ring Road.<span style="mso-spacerun: yes;"> </span>I’m not going to claim I have found the
average rental price in these cities, but this will give us an idea</div>
<br />
<ul>
<li><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";"></span></span></span>Oxford: <a href="http://www.rightmove.co.uk/property-to-rent/property-46220360.html?backListLink=%2Fproperty-to-rent%2Fmap.html%3FlocationIdentifier%3DREGION%255E1036%26insId%3D1%26minBedrooms%3D3%26maxBedrooms%3D3%23_includeLetAgreed%3Don%26houseFlatShare%3Dfalse%26locati">This</a>
3 bed semi costs £1,500 pcm, so fees would be 5% of annual rental cost.<span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";"> </span></span></span></li>
<li>Bristol: <a href="http://www.rightmove.co.uk/property-to-rent/property-43642180.html?backListLink=%2Fproperty-to-rent%2Fmap.html%3FlocationIdentifier%3DREGION%255E1036%26insId%3D1%26minBedrooms%3D3%26maxBedrooms%3D3%23_includeLetAgreed%3Don%26houseFlatShare%3Dfalse%26locati">This</a>
3 bed flat costs £1,395 pcm, so fees would be 5% of annual rental cost.</li>
<li><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";"></span></span></span>Southampton: <a href="http://www.rightmove.co.uk/property-to-rent/property-29836122.html?backListLink=%2Fproperty-to-rent%2Fmap.html%3FsearchType%3DRENT%26locationIdentifier%3DREGION%255E1231%26insId%3D2%26radius%3D0.0%26displayPropertyType%3D%26minBedrooms%3D3%26maxBedrooms%3D">This</a>
3 bed semi costs £925 pcm, so fees would be 8% of annual rental cost.</li>
<li><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";"></span></span></span>Manchester: <a href="http://www.rightmove.co.uk/property-to-rent/property-43900624.html?backListLink=%2Fproperty-to-rent%2Fmap.html%3FsearchType%3DRENT%26locationIdentifier%3DREGION%255E904%26insId%3D4%26radius%3D0.0%26displayPropertyType%3D%26minBedrooms%3D3%26maxBedrooms%3D3">This</a>
3 bed house costs £1,495 pcm, so fees would be 5% of annual rental cost.</li>
<li><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";"></span></span></span>Birmingham: <a href="http://www.rightmove.co.uk/property-to-rent/property-45910727.html?backListLink=%2Fproperty-to-rent%2Fmap.html%3FsearchType%3DRENT%26locationIdentifier%3DREGION%255E904%26insId%3D4%26radius%3D0.0%26displayPropertyType%3D%26minBedrooms%3D3%26maxBedrooms%3D3">This</a>
3 bed house costs £1,000 pcm, so fees would be 8% of annual rental cost.</li>
</ul>
<br />
<div class="MsoNormal">
Overall, based on a quick but unscientific survey, we are
talking about fees representing between 5% and 8% of the rental cost outside of
London.<span style="mso-spacerun: yes;"> </span>In London, <a href="http://www.rightmove.co.uk/property-to-rent/property-45849605.html?backListLink=%2Fproperty-to-rent%2Fmap.html%3FsearchType%3DRENT%26locationIdentifier%3DSTATION%255E3515%26insId%3D5%26radius%3D0.0%26displayPropertyType%3D%26minBedrooms%3D3%26maxBedrooms%253">this</a>
3 bed flat is available for £2,275 pcm, so the fees would represent 6% of the
annual rental cost, this is within the range for the rest of the country. </div>
<div class="MsoNormal">
<br />
This is small, but could be significant, but it is all rather beside the point anyway, because the policy will not save
tenants anywhere any money whatsoever.<span style="mso-spacerun: yes;">
</span>The reasoning, once again, is the fixed supply of housing which cannot
increase at anything like the rate at which it needs to because of the UK’s planning
regime.<span style="mso-spacerun: yes;"> </span>Tenants have no reason to
distinguish between money spent on housing in the form of estate agent fees or
money spent on housing in the form of rent.<span style="mso-spacerun: yes;">
</span>So if the estate agent fees go down, the money they are willing to spend
on rent will just go up by exactly the same amount. <span style="mso-spacerun: yes;"> </span>From the perspective of the landlords, the
abolition of estate agent fees is just like an increase in the quantity of
housing demanded at any given price.<span style="mso-spacerun: yes;"> </span>But
the planning regime means that the supply of housing barely responds to changes
in the price of housing, so we can think of the supply curve as being virtually
vertical.<span style="mso-spacerun: yes;"> </span><br />
<br />
<span style="mso-spacerun: yes;">The </span>result is an increase in prices and tenants are no better off. The real beneficiaries will be the landlords who will start to see higher rents. So just like the coalition's "help to buy" policy, this policy, which as advertised as being on the side of Generation Rent, actually benefits those who already own homes, rather than the people it is supposed to be helping. Still at least this policy transfers resources from estate agents to home owners, rather than help to buy, which transfers the resources from the people it is supposed to be helping.</div>
Anonymoushttp://www.blogger.com/profile/03692686140237259782noreply@blogger.com0tag:blogger.com,1999:blog-2035690183995969825.post-76992812160796154902013-09-21T04:52:00.002-07:002013-09-21T04:53:30.476-07:00Is This a Tax or a Subsidy I See Before Me?<!--[if gte mso 9]><xml>
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<br />
<div class="MsoNormal">
So Edward Samuel Miliband, the leader of the Labour Party,
has finally promised to abolish the spare room tax, or should that be the spare
room subsidy?<span style="mso-spacerun: yes;"> </span>I’m not entirely clear.<span style="mso-spacerun: yes;"> </span>Every Labour party politician assiduously
refers to this as the spare room tax and every member of the Conservative party
assiduously refers to the spare room subsidy. Their various supporters in the
press follow suit, so which is it?<span style="mso-spacerun: yes;"> </span>In
essence, this is about the use of language to bias a debate. </div>
<div class="MsoNormal">
</div>
<br />
<ul>
<li>If it is a tax being imposed on poor people, then that is
more evidence that the people imposing it are heartless Tories. </li>
<li>If it is a subsidy being withdrawn, then that is further
evidence that people who oppose the policy just want to spend money and would
explode the deficit if they got power.</li>
</ul>
<br />
<div class="MsoNormal">
This kind of labelling is an old (and quite transparent)
trick, and one that I have already used twice in this post alone (although you
may have to know what my own political bias is in order to spot one of them).</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Technically speaking, I have more sympathy with the Conservative
description of the policy as what is happening is that a subsidy is reduced if
the family living in subsidised accommodation is judged to have more than
sufficient living space.<span style="mso-spacerun: yes;"> </span>I suspect some
quick witted Conservatives will start saying “there he goes again making
promises he can’t keep: You can’t abolish a tax that doesn’t exist.”<span style="mso-spacerun: yes;"> </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Although withdrawal of a subsidy can have effects similar to
the imposition of a tax.<span style="mso-spacerun: yes;"> </span>Indeed, a
subsidy is simply a negative tax rate, and so there is a point that if a
subsidy is reduced, that is mathematically the same as increasing a tax. This
often leads some people to cast a reduction in tax rates, or a refusal to tax a
good they think should be taxed as subsidising the good in question. </div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The problem with using this logic to cast the failure to
impose taxes you like as a subsidy and the failure to give out a subsidy you
like as a tax is that it is highly vulnerable to <i style="mso-bidi-font-style: normal;">reductio ad absurdum</i>.<span style="mso-spacerun: yes;"> </span>A
friend and I were once discussing an article which referred to the withdrawal
of a tax on mortgages (which happened about 20 years ago) as a subsidy for
private home owners. At the time we were sitting in Oxford’s <a href="http://www.manor-road.ox.ac.uk/" target="_blank">economics department </a>which is one of those buildings where all the external walls are
made of floor to ceiling windows, so I had to point out that the abolition of
the Window tax in 1851 meant we were in the most subsidised building in Oxford. Indeed, under that view, the <a href="http://the-shard.com/the-view-from-the-shard" target="_blank">Shard of Glass </a>in London is
receiving an eye wateringly large subsidy (adjusting the taxes that were charged for inflation).</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
</div>
<div class="MsoNormal">
To go one step further into the absurd, before breakfast, I
could claim that books have been heavily subsidised by the government’s failure
to tax them at £1,000 per book. After breakfast, I can claim that books have
been heavily taxed by the government’s failure to subsidise each book by
£1,000. The only thing that has actually changed while I was having breakfast
is my reference price, not the policy.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
So there must be some reference where we can refer to the
good as either being taxed or subsidised.<span style="mso-spacerun: yes;">
</span>One extremely convenient one would simply be to look at whether the government
is paying out money (in which case we should probably refer to a subsidy) or
whether the government is taking in money (in which case we should probably
refer to a tax).<span style="mso-spacerun: yes;"> </span>The key advantage of this
way of labelling things is simplicity, to know whether a policy is a subsidy or
a tax, you just need to look at what happens to the government’s budget. Under
this convention, the Conservatives are correct and the housing benefit changes
constitute a reduction in subsidy rather than an increase in tax.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
However there is another way of looking at this which allows
us to be more sympathetic to Labour. We could say that a policy is a
tax if it raises the price above the market price that would prevail if there were
no market imperfections, and that it is a subsidy if it lowers the price below the
one that would prevail if there were no market imperfections. One attractive
property of this way of labelling policies is that we can refer to the refusal
to tax petrol in a manner that takes the price of the carbon externality into
account as a subsidy.<span style="mso-spacerun: yes;"> </span>In this labelling
scheme, any policy that involves any kind of subsidy or tax is <i style="mso-bidi-font-style: normal;">per se</i> inefficient. Since the price of
housing in the UK is kept artificially high by imperfections in the housing
market, this would allow us to cast the benefit changes as a tax and say that
Mr. Miliband is correct to talk about abolishing the bedroom tax.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
If this labelling scheme appeals to you, then I just have
one question for you and Mr. Miliband: So you are going to be taxing those who
are ineligible for housing benefit how much?</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
I thought so. It is probably best if we just stick with the definitions
of tax and subsidy that refer to the effect on government spending and
income.<span style="mso-spacerun: yes;"> </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
None of this makes any comment on whether reducing housing
benefit in this way is the correct policy, it is just about whether we should
call it a tax or a cut in subsidy. Now might be a good time to start openly
discussing the merits of this particular subsidy and whether it should be
reduced or not; and if it should be reduced, is this the right way to go about
it?</div>
Anonymoushttp://www.blogger.com/profile/03692686140237259782noreply@blogger.com4tag:blogger.com,1999:blog-2035690183995969825.post-55021856727190232312013-09-20T00:15:00.000-07:002013-09-20T02:46:16.624-07:00Pampered or Rational?<!--[if gte mso 9]><xml>
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<br />
<div class="MsoNormal">
So a recent <a href="http://www.huffingtonpost.com/wait-but-why/generation-y-unhappy_b_3930620.html" target="_blank">post </a>about why Generation Y is so miserable
caused a bit of a fuss recently, and a response can be found <a href="http://aweinstein.kinja.com/fuck-you-im-gen-y-and-i-dont-feel-special-or-entitl-1333588443/1335055150@maxread" target="_blank">here</a>. I’m not
going to try and endorse or deny the stuff about entitlement. For one thing I
am of Generation Y myself, so if I bite on that bait, I will only be providing
evidence for the other comment about Generation Y that they don’t respond well
to negative feedback. My main point is simply as follows: The trends identified
in the “waitbutwhy” article are actually rational responses to a changing work
environment. In particular pensions used to provide incentives which dramatically
increased the financial value of careers which would give rewards only after
many years’ hard work. I don’t want to get drawn into too much of the institutional
detail here, if for no other reason than that those details differ on different
sides of the Atlantic, so I’m afraid it is going to be pretty broadbrush at
this point..<span style="mso-spacerun: yes;"> </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
While institutional details differ, the general pattern is
similar.<span style="mso-spacerun: yes;"> </span>In the immediate post-war
years, with greater faith in what the state could achieve, many Western
countries set up “pay as you go” pension systems, where each generation would
pay the pensions (and other retirement benefits) of the one that preceded it
through the tax system. A bit of nominal ring-fencing goes on, but ring-fencing
like that is normally just window dressing. </div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
There is nothing wrong in principle with a pay as you go
system.<span style="mso-spacerun: yes;"> </span>Indeed, it can be an important
way to ensure that the generations alive and approaching retirement when the
pension system is set up do not miss out.<span style="mso-spacerun: yes;">
</span>However when there is a baby boom (as there was in the immediate post
war years), the system can be put under a great deal of strain.<span style="mso-spacerun: yes;"> </span>When the baby boomers reach working age,
there are a lot of them to spread the burden of supporting the older
generations. When they retire, there will be a lot of them who need to be supported
by the subsequent generations.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
But there has been another trend, which means that each
retired baby boomer will be an even larger burden for subsequent generations
than the pensioners they supported in their working life.<span style="mso-spacerun: yes;"> </span>The baby boomers will live much longer, their
lives being preserved by expensive medical treatments (courtesy of the tax
payer again), but retire at virtually the same age. In the UK, the age at which
people most commonly die has increased by 10 years for men and by 5 years for
women since 1980. This means that the typical man enjoys twice as many
retirement years today as the average baby boomer did. There is nothing wrong
with extra longevity, but it does mean that there are more pensioners whose
pensions and other benefits need to be paid for by a relatively smaller
population of workers.<span style="mso-spacerun: yes;"> </span>That means a
larger burden for each worker to bear.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Most of the solutions to this problem amount to moving the
stable door from wide open to ajar once the entire team of horses have got out
into the wild and are well on the way to producing more horses. Broadly
speaking, the plan among those countries that are planning to do anything is to
slightly raise the retirement age long after the baby boomers have retired. As
with any “solution” to a problem which fails to go far enough, this simply
means that more drastic actions will be required later, probably just as
Generation Y is nearing retirement age. That age will probably be substantially raised,
and the retirement benefits they will enjoy have already been drastically
reduced compared to those that will be enjoyed by the baby boomer generation.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
However this offers some insight into one of the differences
highlighted between generation Y and their parents. Their parents expected to
work until they were 65 and then enjoy a good 20 years of retirement. In those
circumstances it is rational to look for a career purely on financial criteria.
Generation Y’s parents will also, for the most part, benefit from pension
schemes based on their final salaries.<span style="mso-spacerun: yes;">
</span>This dramatically increases the financial benefits of a career which
sees very large salaries right at the end, because that has a huge effect
on pension income. </div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Generation Y is probably expecting to live to about 90 and
retire at 86 (yes I am exaggerating, but the point is they will work longer and
enjoy fewer years of retirement). The closure of most final salary pension
schemes also means that sudden salary rises at the end of their careers will
not have such a dramatic effect on their lifetime incomes as it did for their
parents.</div>
<div class="MsoNormal">
All this adds up to two things:</div>
<ul>
<li>Rationally the early financial rewards to their
careers are more important to Generation Y than they were to their parents; and</li>
</ul>
<ul>
<li>Rationally their careers will be a much bigger
part of their lives and so Generation Y should be looking for a career where
they can follow their passion rather than one that merely provides a living.</li>
</ul>
So maybe the feelings of frustrated expectations and the desire for earlier rewards from their career, and a career that provides a lot more job satisfaction are more than simply the selfish demands of a pampered generation. They might simply be rational responses to the environment they face.Anonymoushttp://www.blogger.com/profile/03692686140237259782noreply@blogger.com0tag:blogger.com,1999:blog-2035690183995969825.post-1341845857060838402012-08-03T04:07:00.001-07:002012-08-03T04:07:35.524-07:00Olympic ToutsFirst, I have been informed that "tout" is something of a British - English word, so I'll start by explaining that a tout is someone who hangs around sporting venues selling tickets. Normally someone else's unwanted ticket that they bought.<br />
<br />
<br />
<div class="MsoNormal">
I have to confess something here. I am an Olympic Refusenik. The only "benefits" of the games I
have seen so far are: </div>
<div class="MsoNormal">
</div>
<ul>
<li><span style="text-indent: -18pt;">It is much more difficult to get on the tube. </span></li>
<li><span style="text-indent: -18pt;">One only has to spend 5 minutes or so at a major
train station before Boris Johnson's irritating voice comes up telling us that
"This is… The big one" and advising us to go to an utterly useless
website to re-plan our journeys.</span></li>
</ul>
<br />
<div class="MsoNormal">
However one Olympic story has grabbed my interest. (OK, two stories if you count Boris and the
zip wire!) The twin outrage at empty
seats in the arenas and ticket touts making money off the games. As a friend pointed out on Twitter, it is
wrong to draw too much of a connection between these two issues. Most of the empty seats are, in fact, those
that were reserved for the "Olympic family" of VIPs and dignitaries
associated with the games. If this is
the case, it is highly unlikely that these would be the seats that touts are
able to sell on.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
However the attitude to touts is interesting in itself. People do get genuinely very angry about
touts, even those selling genuine tickets, and this often drives some
economists crazy! From our perspective,
touts who sell genuine tickets are fulfilling an important economic function,
moving goods and services from people who don't value them very much to people
who place a great deal of value on them.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Let's go back to the point where tickets were being
sold. People were getting up very early
in the morning to enter a "lottery" where they said which events they
wanted to go to and would then "win" their tickets or not. If you "won" the tickets, you still
had to pay for them, but this way the tickets themselves could be priced below
the market price so that the games could be enjoyed by everyone. The fear is that otherwise the games will be
a rich person's pleasure.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Naturally some enthusiasts entered the lottery for many
events and ended up with nothing. Others
entered the lottery and won almost everything they said they'd want to go to. People who won tickets to nearly everything
they entered the lottery for would be spending far more money on Olympic
tickets than they wanted. </div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
This is a prime example of an allocation mechanism that will
create the conditions for a thriving secondary market. On one side of the market we have people who
really wanted to go to some Olympic events but ended up with tickets to far too
many. On the other side of the market we
have people who wanted to go to lots of Olympic events but ended up without any
tickets. We should find some way to get
excess tickets on one side to people who really want tickets on the other side.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
If someone came along and offered to coordinate this
process, giving of their time to match ticketless sports fans with
over-ticketed sports fans and broker a deal, would we say that they were doing
something wrong? Is that something that
should lead to an arrest, conviction and criminal record? If they are doing it for free, then I, and I
suspect a great many people, would say no.
It is only when they are making money from this activity that people
seem to have a problem with it. I have
to admit to being puzzled as to why. The
process of brokering takes time.
Furthermore, if the tout reallocates tickets by purchasing them from
those who don't want them and selling them on, then they are taking on
considerable risk if they cannot find a buyer.
People need to be compensated for taking risks.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<a href="http://blogs.telegraph.co.uk/finance/timworstall/100019212/of-course-there-are-empty-olympic-seats-our-victorian-government-is-arresting-anyone-who-tries-to-sell-them/" target="_blank">Tim Worstall</a> suggests that it is a Victorian attitude to the
grubby business of trade. True wealth
ought to be inherited rather than made.
There is something not quite right about this explanation being applied
to modern Britain. Two of the most
popular television shows in the UK today are <i>The Apprentice</i> and <i>Dragon's
Den</i>, where participants show off their business acumen, and these have
propelled the businessmen involved to a celebrity status. On the whole, Britain today is more
comfortable with wealth creation than it has been in a long time.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
I suspect that the explanation lies elsewhere. I suspect the issue is the source of the
wealth that is being generated by touts.
Tickets were sold in the primary market below market price and assigned
via a lottery to ensure that the Olympic games were for everyone and could be
enjoyed by everyone, not just the rich.
Had the tickets been sold at the market price, the games organisers
would have made more money and the return on the investment in hosting the
games for UK Plc. would be higher. A
similar argument could be made about touts at football matches and other
sporting events. The tout's profits are
the profits that organisers decided to leave on the table so that the events
would be "for everyone". I
suspect that this is the real source of the anger felt towards touts and it is
why touting is illegal. However, just
because this is the source of the anger does not necessarily mean it is
rational or sensible to make touting illegal.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
While this argument may apply to other sporting events, it
does not quite work for the Olympics. The Olympic organisers chose (in the form of a lottery) an extremely inefficient
means of allocating tickets that was always likely to create this secondary
market. There were alternative
mechanisms that would have ensured tickets were initially held by enthusiasts
for the sports involved. Tickets could
have been given away to the relevant sporting clubs across the country. For example tickets for Olympic Judo could
have been given away to local Judo clubs who would then have decided how many
to sell; how many to allocate to members and so on. If you want to find out who the e.g.
badminton enthusiasts are, a badminton club is a good place to start. Such an allocation mechanism would have been
very good for the clubs allowing them to enthuse their members or raise cash
for sporting equipment according to their own needs. Such an allocation mechanism would not
eliminate the problem of ticket touts, but it would have resulted in a smaller
secondary market.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
However, to an extent we have to accept that the premise of
making the games something that was "for everyone" is a bit
shaky. We have the problem of touts
because the people we are trying to "help" by giving them low cost
tickets to sporting events would prefer to have the market value of the ticket
rather than the ticket itself. It is
entirely possible that there are some people who lack sufficient disposable
income to pay the market price of a ticket, but would not sell it at the market
price if you gave it to them. The
question is how to distinguish them from the people who would sell their
tickets at the market price. Asking them
to put their hands up does not seem to have worked. </div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
However, even if we could perfectly identify them, there would still be a secondary market. Life happens and plans change, the events people thought they could make when the bought their tickets they can no longer get to. Under these circumstances, it is understandable that they should want to get as much money as they possibly can for their ticket, and, in some ways, tickets like this should be reallocated through the price mechanism. We could view this as redistributive - moving money from richer sports fans to (on average) poorer sports fans. It might be better to accept that the secondary market exists and to start regulating it to protect punters from fraud rather than trying to stamp it out.</div>Anonymoushttp://www.blogger.com/profile/03692686140237259782noreply@blogger.com1tag:blogger.com,1999:blog-2035690183995969825.post-12006443661569971232012-07-31T03:21:00.000-07:002012-07-31T03:21:51.893-07:00Unintended Consequences?I am returning to the theme of Housing for this post, but will concentrate exclusively on the rental sector. Oxford City Council have introduced new licensing conditions on what are called Houses of Multiple Occupancy (HMOs). Nationally, an HMO needs to be licensed if it is "large" and is considered to be "large" if:<br />
<div>
<ul>
<li>There are five or more tenants.</li>
<li>the house has three or more floors.</li>
</ul>
<div>
See the relevant part of <a href="http://www.direct.gov.uk/en/homeandcommunity/privaterenting/repairsandstandards/dg_189201" target="_blank">DirectGov</a>. </div>
<div>
<br /></div>
<div>
However in Oxford, the Council has decided to tighten these regulations. They will consider an HMO to require a license if:</div>
</div>
<div>
<ul>
<li>There are more than two tenants.</li>
<li>The house has two or more floors.</li>
</ul>
<div>
The licensing system in Oxford is not being funded by the general tax payer, but by a system of fees on the HMO licenses themselves. The fee is proportional to the size of the house in question, but can rise to around £500.</div>
</div>
<div>
<br /></div>
<div>
So what will be the economic effects of this policy. First, in the short run, landlords who do apply for the license will actually be unable to pass the tax on to their tenants! This might well be surprising for some, but the economic logic here is as follows. The scarcity of housing means that landlords are effectively already extracting from their tenants the maximum willingness to pay of each tenant. So there is no room to extract more. However, in the longer run, landlords may decide that the bureaucratic costs of applying for the licenses and making any changes that the council requires as a result are just too great and stop renting their properties to multiple tenants. Indeed, this is just what seems to be happening in this story from the <a href="http://www.oxfordmail.co.uk/news/yourtown/oxford/9840489.Couple_forced_out_by_housing_regulations/?ref=twtrec" target="_blank">Oxford Mail</a>.</div>
<div>
<br /></div>
<div>
Once landlords start leaving the HMO market, then rents <i>will</i> rise as the (already too small) supply of rental housing contracts. But what happens to the houses that were being rented as HMOs? Will they be rented or sold to families and singletons? Will this drive down the rents or prices that families and singletons have to pay? Unlikely. The fundamental problem of scarce housing still exists. Indeed, high housing costs are one of the reasons that people delay starting families and live with friends in HMOs for longer.</div>
<div>
<br /></div>
<div>
It is more likely that in order to extract maximum value from their properties, landlords will instead divide them up. They will turn each floor into a separate flat with its own toilet and kitchen facilities etc, so that they are not HMOs and rent out the floors separately. In order to create the extra kitchens and bathrooms this will require, the total number of bedrooms will fall. So the total housing supply falls leading to higher rents for the younger people starting out in life who will be renting these properties. Naturally this process will take time; cost money; and require planning permission. But if the council is serious about limiting HMOs (see below), it may well become the best option for those who own homes in Oxford.</div>
<div>
<br /></div>
<div>
For tenants forced out of their homes, this is a tragedy. Such consequences of a policy are often referred to as "unintended consequences", this is the term used in the <a href="http://www.oxfordmail.co.uk/news/yourtown/oxford/9840489.Couple_forced_out_by_housing_regulations/?ref=twtrec" target="_blank">Oxford Mail</a> story. However in this case, the consequences are so transparently obvious that it is difficult to call them "unintended". Indeed a brief perusal of <a href="http://www.oxford.gov.uk/PageRender/decH/Houses_in_Multiple_Occupation_occw.htm" target="_blank">Oxford City's website</a> and the website of the local <a href="http://www.oxfordlabour.org.uk/oxford-labour-takes-action-improve-hmos-secure-balanced-communities" target="_blank">political party that controls it</a> reveals that, far from being an unintended consequence, forcing out people like the tenants from the <a href="http://www.oxfordmail.co.uk/news/yourtown/oxford/9840489.Couple_forced_out_by_housing_regulations/?ref=twtrec" target="_blank">Oxford Mail</a>'s story is the point! Note that <a href="http://www.oxford.gov.uk/PageRender/decH/Houses_in_Multiple_Occupation_occw.htm" target="_blank">Oxford City's website</a> includes a section "Why are HMOs a problem in Oxford?" The phrasing of the question itself reveals more information than the answer. The controlling party boasts of having <span style="font-family: inherit;">"... <span style="background-color: white; text-align: justify;">taken action to ensure local communities have a balance of housing, rather than HMOs taking over entire areas." The prejudice against HMOs and the young people who normally live in them is clear.</span></span></div>
<div>
<span style="font-family: inherit;"><span style="background-color: white; text-align: justify;"><br /></span></span></div>
<div>
<span style="font-family: inherit;"><span style="background-color: white; text-align: justify;">Why is the local council trying to reduce the number of HMOs? </span></span><a href="http://www.oxford.gov.uk/PageRender/decH/Houses_in_Multiple_Occupation_occw.htm" target="_blank">Oxford City's website</a> highlights two general problems with HMOs. To paraphrase:</div>
<div>
<ul>
<li>Across the entire country, the landlords can be a bit dodgy and neglect safety issues.</li>
<li>There tend to be a lot of complaints about the people who live in them.</li>
</ul>
<div>
There is no satisfactory reason why we should expect that the first problem is unique to HMOs. Indeed it shows a somewhat disturbing set of priorities in some respects. If a dodgy landlord doesn't get the boiler checked we want to stop them renting to a group of young professionals or students and would rather they rented to a family? Really? Wouldn't it be better to ensure that <i>all </i>tenants knew their rights and that they could demand that the landlord get an annual gas safety certificate? Wouldn't it be better to encourage tenants to report anything in their property that was unsafe? (To align incentives, they could be encouraged to do so at the end of a tenancy during negotiations over return of the deposit). If the point of these rules is really to help tenants, it strikes me that evicting them is an "innovative" strategy.</div>
</div>
<div>
<br /></div>
<div>
Regarding the second issue, the council are being exceptionally short sighted and this <i>is </i>possibly a case of unintended consequences. From this perspective, the problem of HMOs is not the houses or the landlords, but the people who rent them. The people who rent them are unlikely to leave Oxford and camp outside the ring road. Rather it is more likely, in the long run, that they will be the people who rent the same houses again once they have been converted into flats. In that event, I would expect the number of complaints to actually increase. Currently entire houses are rented and people who live in them know each other. Noise travels between the floors, but differences and arguments about this can be worked out between the various house mates who all know each other and are friends. Friends are able to resolve these differences relatively amicably. The noise externality is "internalised" in economics speak. However once these houses have been converted into separate flats, noise will still travel between them, but the people who live in the different flats won't know each other and won't be friends. They are therefore more likely to involve the council in disputes about noise and so on. This policy will further reduce community cohesion rather than increase it!</div>
<div>
<br /></div>
<div>
I once thought National policy on Housing in the UK was misguided. (See previous post on housing). Compared to some local policies, it now appears positively insightful. And that is saying something...</div>Anonymoushttp://www.blogger.com/profile/03692686140237259782noreply@blogger.com4tag:blogger.com,1999:blog-2035690183995969825.post-56354422797679846342012-07-26T06:49:00.000-07:002012-07-26T06:49:07.159-07:00Cash in Hand<div style="text-align: justify;">
<br />
<div class="MsoNormal" style="margin-bottom: .0001pt; margin: 0cm;">
<span style="font-family: 'Times New Roman', serif; font-size: 13.5pt;">David Gauke, a minor
Treasury Minister from the Conservative side of the coalition has said it is
"<a href="http://www.telegraph.co.uk/finance/personalfinance/consumertips/tax/9421590/Middle-classes-who-pay-cash-in-hand-morally-wrong-and-aiding-law-breaking-says-minister.html" target="_blank"><span style="color: blue; mso-bidi-font-size: 11.0pt;">morally
wrong</span></a>" to pay cash in hand seeking a discount. This did
not actually have the connotation of a pronouncement from on high that some of
the later press coverage has imputed. The minister was answering
questions after a speech. The phrase "morally wrong" was not
chosen by the minister, it was chosen by the journalist asking the question.
The minister seems to have been saying (somewhat clumsily) two things:<o:p></o:p></span></div>
<ol start="1" type="1">
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list 36.0pt; text-align: left;"><span style="font-family: "Times New Roman","serif"; mso-bidi-font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">People
should not ask for a discount if they pay in cash in the knowledge that
the tradesman will use the cash without declaring it; and<o:p></o:p></span></li>
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list 36.0pt; text-align: left;"><span style="font-family: "Times New Roman","serif"; mso-bidi-font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">Stopping
tax avoidance is important, but the "hidden economy" is a
"very substantial" part of it as well.<o:p></o:p></span></li>
</ol>
<div align="left" class="MsoNormal" style="margin-bottom: .0001pt; margin: 0cm; text-align: left;">
<span style="font-family: "Times New Roman","serif"; mso-bidi-font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">One of
these points is interesting; the other is mundane. The attention each has
received looks to me to be the wrong way around and that says something about
us and our priorities.<o:p></o:p></span></div>
<div align="left" class="MsoNormal" style="margin-bottom: .0001pt; margin: 0cm; text-align: left;">
<br /></div>
<div align="left" class="MsoNormal" style="margin-bottom: .0001pt; margin: 0cm; text-align: left;">
<span style="font-family: "Times New Roman","serif"; mso-bidi-font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">The
mundane point is that people should not say to their plumber or cleaner
something along the lines of "I'll pay you in cash; you then don't need to
report the income; and you can give me a share of the money you save on taxes
through a discount from your usual rate". As statements go, it is
difficult to see why this has attracted the attention it has. All it is
really saying is that you shouldn't ask someone to commit a crime on your
behalf, albeit a relatively minor one given the amounts involved.<o:p></o:p></span></div>
<div align="left" class="MsoNormal" style="margin-bottom: .0001pt; margin: 0cm; text-align: left;">
<br /></div>
<div align="left" class="MsoNormal" style="margin-bottom: .0001pt; margin: 0cm; text-align: left;">
<span style="font-family: "Times New Roman","serif"; mso-bidi-font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">Note that
this is quite different from what I suspect usually happens when cash in hand
payments go undeclared, which is where the tradesman <i>offers</i> a
discount if you pay in cash. This is a bit more of a grey area. Not
being a Philosopher, I think I'll leave off this point and move onto the second
part of what the minister was (mis)communicating.<o:p></o:p></span></div>
<div align="left" class="MsoNormal" style="margin-bottom: .0001pt; margin: 0cm; text-align: left;">
<br /></div>
<div align="left" class="MsoNormal" style="margin-bottom: .0001pt; margin: 0cm; text-align: left;">
<span style="font-family: "Times New Roman","serif"; mso-bidi-font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">The
minister was saying that stopping tax avoidance schemes at the top of the
income distribution was important, but the hidden economy of tax evading
plumbers and cleaners is just as important. There was a sense in which
the minister was equating the two and suggesting that if we are going to
crackdown on one, we should also crackdown on the other. Again, as I am
not a Philosopher, I shall leave the ethical analysis to others and just
consider the economics of this statement - in economic terms, this is palpable
nonsense!<o:p></o:p></span></div>
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<span style="font-family: "Times New Roman","serif"; mso-bidi-font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">According
to the <a href="http://www.hmrc.gov.uk/stats/personal_incomes/statistics-release-note.pdf" target="_blank"><span style="color: blue;">HMRC</span></a>, the median income is
approximately £19,600 per year. Whereas the income of the 99th percentile
(this is the minimum income to claim membership of the top 1%) is £149,000.
The post-tax median income is £17,200. The post-tax income of
someone at the 99th percentile is £105,000. A very rough and ready
calculation (assuming the order of taxpayers remains the same before and after
tax) suggests that the median taxpayer pays £2,400 per year in tax and the
taxpayer at the 99th percentile pays £44,000 per year in tax. So (on a
very rough and ready calculation) catching a tax avoider or evader at the top
of the income distribution will recover for the Treasury more than 18 times as
much money as catching a tax avoider or evader in the middle of the
income distribution. So the minister is right only if with the same
effort and cost that it takes to catch one tax avoider at the top of the income
distribution, we could catch around 20 tax avoiders in the middle of the
distribution. This may in fact be the case, and so there may be greater
net benefit to the treasury from going after tax avoiders in the middle of the
distribution, but that needs to be part of the discussion and it wasn't.<o:p></o:p></span></div>
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<span style="font-family: "Times New Roman","serif"; mso-bidi-font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">There
are, of course, factors which should be considered but have been left out of
this analysis for lack of data. <span style="background: white;">One
example that would make the calculations even less favourable for the Minister
is that we shouldn't be comparing the 99th percentile with the median, but the
mid-point of the top 1% with the 25th percentile which might have a higher
concentration of self-employed tradespeople. That would put a much higher
threshold on how much easier it would have to be to catch people at the lower
end of the income scale in order to make targeting them worthwhile.
However, in the Minister's favour,</span> <span style="background: white;">there are a greater number of people at lower points of the income
scale, and there may be economies of scale in targeting these groups that
improve the economic argument for doing so. There may be some reason to
believe that tax evasion is more common at lower income brackets, though the
Minister has not stated any reasons why we might think this, but if it were the
case, that would change the analysis somewhat. Some combination of these
two points seems to have been what the Minister was driving at when he referred
to "the hidden economy" being a "very substantial" part of
the problem. Although this does raise the question: If this part of the
economy is "hidden", how do we know how big it is?</span><o:p></o:p></span></div>
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<span style="background: white; font-family: "Times New Roman","serif"; mso-bidi-font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">There is one final point to consider in all of this and I shall have to
try not to sound too much like I am gloating. The ideas of providing a
"Nudge" to effect change described in the book of that name by Thaler
and Sunstein have apparently been influential in Downing Street. The idea
is one that can work well when there is a behavioural bias to be overcome.
Increasing pensions savings by making pension schemes "opt-out"
rather than "opt-in" is a good example. One could (generously)
read David Gauke's statement as an attempt to nudge the population into
not accepting "cash in hand" discounts and even reporting
tradespeople who suggest it. If that is the case, then it would
seem to have backfired. Nudges work best when they overcome a behavioural
bias and point us in the direction of our own interest. A Nudge will have
a great deal of difficulty in getting us to take actions which run counter to
our own interests.</span><span style="font-family: "Times New Roman","serif"; mso-bidi-font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;"><o:p></o:p></span></div>
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</div>Anonymoushttp://www.blogger.com/profile/03692686140237259782noreply@blogger.com0tag:blogger.com,1999:blog-2035690183995969825.post-38998391141870269502012-06-22T06:57:00.002-07:002012-06-22T10:53:12.169-07:00Lies, Damned Lies, and...An interesting <a href="http://www.bbc.co.uk/news/uk-politics-18539472" target="_blank">story</a> on the BBC today. Apparently the last Labour government "got it wrong" on immigration. What is as interesting as Miliband's shift is the reporting of immigration and the numbers. Take the following from the story:<br />
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<span style="color: #333333; font-family: Arial, Helmet, Freesans, sans-serif; font-size: 14px; line-height: 18px;">"But its [the Labour government at the time] estimates that only about 13,000 people a year would come to the country were soon proved wrong, with a peak net migration figure, from the EU and elsewhere, of 252,000 in 2010."</span></blockquote>
The estimate of the number of people who would be coming into the UK from the 8 extra EU accession countries who joined in 2004 is compared to the peak of net migration <b>from everywhere</b> that was taking place six years later. Unsurprisingly, the net migration to the UK from the entire world six years after accession was considerably higher than the initial estimate of how many Accession Countries' citizens would exert their right to free movement by moving to the UK. Comparing these two numbers in this way is simply dishonest!<br />
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It is worth taking a look at the actual <a href="http://www.ons.gov.uk/ons/taxonomy/search/index.html?nscl=International+Migration&nscl-orig=International+Migration&content-type=Dataset&content-type=Reference+table&sortDirection=DESCENDING&sortBy=pubdate" target="_blank">figures</a>. As with all ONS data sites, it is unnecessarily difficult to find the data you might be looking for. The spreadsheet titled "Provisional Long Term International Migration (LTIM) estimates September 2011 (Excel sheet 601Kb)" seems to contain some useful time series data, so let's start there.<br />
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The Accession Treaty came into force in May 2004, that is when citizens of eight Eastern European countries received the right to work in the UK. The initial estimate was that around 13,000 people a year would come. According to the data, 49,000 had come by December 2004. In the first full year for which there is data, 71,000 arrived. Did the government underestimate the number of people who would come? Yes. Did they underestimate the number as badly as the BBC's figures above would suggest? By several orders of magnitude, no. We should remember however that estimating the number of people who will move before they actually move is a very difficult thing to do. One imagines one would conduct surveys, but it would be very expensive to conduct a proper random sampling exercise. Any cost-cutting methodologies (eg. telephone / internet surveys) would risk over-sampling people with a better lot in life more likely to stay.<br />
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But how important is immigration from the EU Accession countries and how important was it overall. The answer is, not very. The graph below shows net immigration by source country. The blue line shows the total net immigration to the UK of Non-British Nationals. The red line shows net immigration from the Accession countries, and the green line shows net immigration from Non-EU countries. While there is a spike in the Accession year, 2004, this seems to have been caused more by immigration from Non-EU countries than from the Accession countries.<br />
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What may be of more concern is the reason people are coming to the UK. In the year to September 2011 (the latest for which I have been able to find figures) 50% of gross immigration to the UK was for the purposes of formal study. In some ways this should not come as a surprise. The UK has a strong presence in international academia and some very strong brand names in this area. Education is actually a good export industry to the UK. The really good news is that if we restrict attention to immigration from outside the EU, this number goes up to 62%. That is good because non-EU students can be charged the full economic cost of their education while EU students have the right to study under the same conditions as domestic students.</div>
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The bad news is that the government has decided students coming for formal study is the area of immigration where they can get "results" quickly in terms of fulfilling their promise to bring immigration down to tens rather than hundreds of thousands. It is almost as if they have decided to sacrifice a valuable export industry in order to fulfill a political promise.</div>
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I am not completely insensitive to people's concerns about immigration. I understand that when the amount you charge for the services you provide is forced down because immigrants enter and offer the service more cheaply, that is distressing. That it is better for the general public who can now afford more of those services is scant comfort, though it be the truth. The economic arguments here are in fact very similar to those for free trade. Yet the political argument for free trade has been fought and won in the past, and so I have hope that the political arguments about immigration can also be fought and won. </div>
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One branch of the argument must emphasize the economic benefits of allowing more economic immigration. Although lowering the price of some labour services is bad for the people who provide those services, it is good for the general public at large who consume those services. Even if this argument is not accepted, it should be generally accepted that no one's lot in life will be improved by reducing the number of people who come to the UK to study.</div>
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While we have to acknowledge that more people put additional strain on the UK's already overstretched infrastructure, this is an argument for building more infrastructure rather than limiting population growth. As an aside the UK's infrastructure would be overstretched without any immigration. What population limiting strategies would then be suggested by those who want to solve the infrastructure problem by limiting immigration?</div>
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However there is another branch of the argument that has yet to be tried. Positive net immigration is a sign that people want to live here rather than where they were born. What better sign could there be of our success as a nation? Positive net immigration is the best evidence available that the UK, for all its problems, is a good place to live. As such, it is something we should, as a nation, be quite proud of. </div>
<br />Anonymoushttp://www.blogger.com/profile/03692686140237259782noreply@blogger.com2tag:blogger.com,1999:blog-2035690183995969825.post-18493029598444117562012-06-20T07:34:00.000-07:002012-06-20T08:33:36.918-07:00Executive PaySo the <a href="http://www.bbc.co.uk/news/business-18514396" target="_blank">government is going to introduce binding votes on pay</a>. This is part of what has been referred to as a "Shareholder Spring" of recent years, which has seen shareholders vote against the remuneration packages of various large firms. However, to date, these votes have been merely advisory.<br />
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<span style="line-height: 15px; text-align: left;"><span style="font-family: inherit;">I have to admit, I was truly gobsmacked when this proposal was first aired a few months ago. I am incredulous that it has ever been the case that shareholders’ votes on remuneration packages for senior management are only advisory. But then, that is what comes of being a theorist. We know how these things are supposed to work, but are often surprised by what turns out to be "custom and practice". </span></span><br />
<span style="line-height: 15px; text-align: left;"><span style="font-family: inherit;"><br /></span></span><br />
<span style="font-family: inherit;"><span style="line-height: 15px; text-align: left;">There is certainly a problem with executive pay. Over the last few years, executive remuneration has risen by around 50%, with no concomitant increase in corporate performance. It is too easy for executives to be rewarded for failure just as they would be rewarded for success. This may in part</span><span style="line-height: 15px; text-align: left;"> </span><i style="line-height: 15px; text-align: left;">explain </i><span style="line-height: 15px; text-align: left;">the poor performance of some firms over the past few years.</span></span><br />
<span style="line-height: 15px; text-align: left;"><span style="font-family: inherit;"><br /></span></span><br />
<span style="line-height: 15px; text-align: left;"><span style="font-family: inherit;">Nevertheless, when it comes to corporate pay, as the bard would say: “The fault, dear Brutus, lies not in our stars, but in ourselves...”</span></span><br />
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<span style="font-family: inherit; font-size: small;">Given the shocking state of affairs, we should perhaps recap the relationship between managers and shareholders. What is the relationship supposed to be in theory, and what has happened in practice?</span></div>
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<span style="font-family: inherit; font-size: small;">In theory, the manager is the servant of the shareholders. Think of the Earl of Grantham and the Butler, Carson from Downton Abbey. The shareholders do not have time to run the company that they own themselves. Even if they did, there may well be people who can do a better job of it than they can. The shareholders and the manager are both better off if the shareholders hire the manager to manage their firm. The manager gets a salary and the shareholders get the profits.</span></div>
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<span style="font-family: inherit; font-size: small;">In practice things seem to have developed quite differently. Managers seem to have gained control of the firms they are running. To continue with the analogy, Carson is now upstairs being dressed by the Earl of Grantham. How has this happened? The answer essentially lies in the strength that comes from being one of a small number.</span></div>
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<span style="font-family: inherit; font-size: small;">Think of the profits of the firms (before executive salaries are deducted) as a resource over which management and owners compete. A solution is negotiated between the two parties and the shareowners then have their say (which is not currently binding). Our experience of arguments and debates might lead us to expect that the group with the largest number will win more out of these negotiations. However we would be wrong. Indeed the greater number of shareholders is precisely what gives the managers the decisive advantage.</span></div>
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<span style="font-family: inherit; font-size: small;">Among the shareholders, informing themselves about all the issues surrounding the executive pay within their firm and arguing about those issues with the management are costly actions. It takes a lot of time to find and understand all the numbers. There is a reward in higher dividends, and the total reward may well outweigh the cost, but that reward is dispersed across all shareholders. Remember that if a shareholder has sensibly diversified their portfolio, then they would ideally be doing this for a large number of firms. However the benefits of these activities are spread across a large number of shareholders.</span></div>
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<span style="font-family: inherit; font-size: small;">Corporate governance activities are what economists would call a public good. The benefits are “non-rival” (one shareholder’s consumption of the benefit does not stop another shareholder from consuming the benefit) and “non-excludable” (it is impossible to exclude one shareholder from the benefit without excluding all). Corporate governance is like the washing up in a shared house. Everyone benefits if it is done, but no one actually wants to do it.</span></div>
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<span style="font-family: inherit; font-size: small;">This is a problem unlikely to solve itself and only likely to get worse! In an egalitarian capitalist society, the ownership of capital should be widely dispersed. More people should own fewer shares. But this will worsen the corporate governance problem and allow managers to get higher and higher remuneration which becomes less and less responsive to performance. As we get more shareholders, the benefits of exerting corporate governance become more dispersed.</span></div>
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<span style="font-family: inherit; font-size: small;">The question then becomes what should be done. Giving shareholders a binding vote on remuneration is certainly a start, but the government may need to go further than this. Managers enjoy the privilege of “agenda control”, meaning that they would still get to decide what precise package the shareholders are voting on. A binding shareholder vote might simply become a costly veto where the shareholders face a choice between approving a pay package, or plunging the company (and its stock price) into uncertainty by wielding a veto. Shareholders should be choosing between two alternative remuneration packages, one put forward by management and one put forward by shareholders. The shareholders should also perhaps hold a vote to decide which package they put forward to compete with the management proposals.</span></div>
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<span style="font-family: inherit; font-size: small;">The measures to increase transparency also provide a good start. What is needed is a way to ensure that when shareholders vote they are conscious that every penny they pay the chief executive is a penny less in dividends for them. Simple reporting of total pay should help to raise this awareness. Although I remain skeptical that managers will find ways of muddying the water here; probably through bonuses or shares issued as bonuses.</span></div>
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<span style="font-family: inherit; font-size: small;">These are all measures that will make it easier for shareholders to re-assert control over their companies. However even these measures might still prove insufficient. Shareholders will still be blighted by what economists call a “common action problem”. Common action problems such as this can be resolved by the parties themselves, after all, they are the people with the biggest incentive to solve them. Better information and voting structures will help, but if they do not allow shareholders to solve the problem, other reforms to corporate governance measures may prove necessary.</span></div>Anonymoushttp://www.blogger.com/profile/03692686140237259782noreply@blogger.com2tag:blogger.com,1999:blog-2035690183995969825.post-72056020730962534932012-06-11T12:56:00.001-07:002012-06-11T12:56:29.068-07:00Housing<span style="background-color: white; color: #444444; font-family: Arial, Verdana, sans-serif; font-size: small; text-align: left;"><b><u>The problem in housing</u></b></span><br />
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<span style="font-size: small;">It helps to be clear about the problem in housing. This is simply that prices are too high. What do I mean by too high?</span></div>
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<li style="list-style-position: outside; list-style-type: circle;"><span style="font-size: small;"><span style="line-height: 19px;">The average age of a first time buyer is now approaching 40!</span></span></li>
<li style="list-style-position: outside; list-style-type: circle;"><span style="font-size: small;"><span style="line-height: 19px;">In the period 2001 - 2010, nominal average earnings rose by 34%, but nominal house prices rose by 94%!</span></span></li>
<li style="list-style-position: outside; list-style-type: circle;"><span style="font-size: small;"><span style="line-height: 19px;">National Averages disguise how the situation is worse in major cities, particularly London.</span></span></li>
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<span style="font-size: small;"><span style="line-height: 19px;">This last point is more important than it sounds. Among the modern couples trying to get on the housing ladder, both partners will (hopefully) work. This limits the geographical choice they will have. It is only in the major cities that they can guarantee that they will both be able to find work in their chosen careers.</span></span></div>
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<span style="font-size: small;"><span style="line-height: 19px;">Many might be forgiven for feeling that the music has to stop some time and they should wait until a crash before they buy. Unfortunately this is wishful thinking. While easier credit has certainly been a factor in the house price boom of the late 20th and early 21st centuries, the way prices (especially in the cities) have held up during the credit crunch, indicates that they are being driven by scarcity. </span></span></div>
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<span style="font-size: small;"><span style="line-height: 19px;"><b><u>To correct the housing market, we must understand the housing market</u></b></span></span></div>
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<span style="font-size: small;"><span style="line-height: 19px;">The problem in the housing market is the severely constrained growth in the supply of new housing. Population growth has outstripped housing growth by a rate of two to one. Furthermore, while the population is growing, the number of households is growing even faster than the population. This is a result of young people waiting longer before they marry and put down roots. Although it is an open question which trend begets which. It is entirely possible that young people wait longer because of the high cost of housing. They are reluctant to start families when they can only afford small quantities of housing.</span></span></div>
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<span style="font-size: small;"><span style="line-height: 19px;">In economic terms, the supply of housing is not adjusting with the price. We can represent this with a vertical supply line. The demand for housing however responds to the price of housing. We can repres</span></span><span style="font-size: small; line-height: 19px;">ent this with downwards sloping line. That line will shift upwards as the population increases; as people get richer; and as credit becomes easier to access. In the last thirty years or so, the population has increased; people got richer (for most of it); and credit became easier to access.</span></div>
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<span style="font-size: small;"><span style="line-height: 19px;">In that time the housing stock has remained virtually static. So the entire change in the housing market comes through in a price increase.</span></span></div>
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<span style="font-size: small;"><span style="line-height: 19px;">With this simple model in mind, we can see how some measures designed to help those who have not yet brought houses, might actually exacerbate the problem. Policies to help home buyers have included reduced stamp duty for first time buyers and government guaranteed mortgages for some buyers. However such policies will only shift the demand curve further up. They will not alter the number of houses, neither will they alter who gets the houses. Indeed a policy such as this is merely a transfer of wealth from tax payers to home owners disguised as a measure to help those who don't yet own homes.</span></span></div>
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<span style="font-size: small;"><span style="line-height: 19px;">The real question then is why has the supply remained fixed? There are only a few possible answers. Basically one of the things required to build houses must be in fixed supply. In order to build houses, one needs: labour; land; and materials. Over the period in which house prices rose so dramatically, labour has not been in short supply. The period encompasses the accession year when the former Eastern Bloc countries joined the EU and their citizens gained the right to come and work in the UK. Neither has there been a particular shortage of materials. Land has been in short supply. This may come as a surprise to anyone who has ever flown over the UK in daylight hours. There seems to be a lot of land available. The problem is that one is not able to build on it. Planning law essentially makes it very difficult or expensive to build more houses. Indeed the more desirable a place is to live, the more difficult it is to build there. Our major cities are protected by a so-called "Green-Belt" that was put in place around 50-60 years ago.</span></span></div>
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<span style="font-size: small;"><span style="line-height: 19px;">While the government is (at the time of writing) trying to reform planning law, cutting more than 1,000 pages from the rule book, it is doubtful whether:</span></span></div>
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<li><span style="font-size: small;"><span style="line-height: 19px;">the reforms will actually go ahead; and</span></span></li>
<li><span style="font-size: small;"><span style="line-height: 19px;">they will actually go far enough.</span></span></li>
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<span style="font-size: small;"><span style="line-height: 19px;"><b><u>What kind of change is needed?</u></b></span></span></div>
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<span style="font-size: small;"><span style="line-height: 19px;">Let's go back to basics. Why might someone think that planning law is needed? Essentially there is what economists call an externality here. If I own the plot of land next to your house, then what I do with land will affect you. Your enjoyment of your house will be affected if I build a tower block of flats on the patch next door. The price of your house will also be affected. The result is that if I want to make any change to my land, I must seek the permission of the local government and this process gives you the right to object.</span></span></div>
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<span style="font-size: small;"><span style="line-height: 19px;">With this in mind, from a political economy perspective </span></span><span style="font-size: small; line-height: 19px;">(this is the branch of economics that considers the incentives of policy makers)</span><span style="font-size: small; line-height: 19px;">, it is not difficult to see why house building has been so sluggish. Bear in mind that there is no one single housing market in the UK. There are a collection of more or less linked but separate markets. Building new houses in any town will increase the supply of housing in that town and so lower the price of houses in that town. The people who's permission must be sought in order to increase the local hosing stock are answerable to the people who already own houses in the area. The economic losers out of development effectively have a veto. No one speaks for the economic winners from proposed development (who are typically poorer than the losers).</span></div>
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<span style="font-size: small; line-height: 19px;">However there is another way to take the externality into account. Let ownership mean ownership, but create a vehicle for owners to commit not to develop. Such vehicles already exist in property law in the form of restrictive covenants. This is best illustrated through an example. Suppose I am a loss making farmer with a field near a village. I could sell the field. The only person who would be interested in buying is a developer. The village is a short commute from London where there are lots of well paid jobs but housing is expensive. Because of this proximity to London, housing is expensive in the village too, just not as expensive as London. If the developer buys the field they will build more houses and the price of housing in the village will fall. The current system effectively gives the villagers a veto on the development of the field. Instead we should give the farmer the ability to sell the right to develop the field to the highest bidder, whether that be the developer or the villagers.</span></div>
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<span style="font-size: small; line-height: 19px;">The development will go ahead if the villagers value a lack of development less than the developer will get from developing the land. The developers profits from developing the land represent the benefits to those currently without housing from getting housing. The development will not go ahead if the benefits to the villagers from keeping the land vacant exceed the benefits to those without housing from being able to move to the village. These are precisely the situations in which we want development to go ahead or not go ahead. Such a system could be achieved by allowing owners to enter five year restrictive covenants with their neighbours. The covenants would be tied to the land rather than the person.</span></div>
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<span style="font-size: small; line-height: 19px;">There is one difficulty with this system which I must admit. There will be a common action problem among the villagers in terms of buying a restrictive covenant from the farmer. Indeed in order to reduce opportunities for corruption, I believe the local council must be prevented from buying restrictive covenants from owners. Otherwise there will be too many opportunities for local politicians to enrich their chums by preventing "ghost" developments that the voters actually would not mind. This actually makes the common action problem worse as people will not have access to the organising technology afforded by local government. However preventing the system from being used corruptly must surely take precedence. Furthermore, after such a long period of too little development, it would take a long while before any reforms led to too much development.</span></div>
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<span style="font-size: small; line-height: 19px;"><br /></span></div>Anonymoushttp://www.blogger.com/profile/03692686140237259782noreply@blogger.com2