A Brexit Thought Experiment...

Let me introduce Nigel.  Nigel is a very wealthy family man who lives in a very wealthy region of the country.  He is in fact the 5th wealthiest man in the country.  He's rather proud of this and mentions it quite a lot.

One day, Nigel is looking through his monthly expenditures and wondering where he can make some savings.  Although he is very wealthy, this is a prudent thing to be doing.  After all, as his mother always said: “look after the pennies, and the pounds will look after themselves.”  Looking through his expenses, Nigel spots that family membership of his golf club looks a bit high.  He pauses to consider this fact.  He doesn’t actually much like the officials who run the golf club.  They have a habit of being a bit officious and petty in enforcing the club's rules.  Is this club membership really worth the money?

Nigel broaches the idea of resigning their family membership with his wife and children over dinner that evening.  To his utter amazement, they look at him as though he’s gone mad, even after he mentions the amount of money they’d save.

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.

Nigel tries to calmly rebut all their points.

Just because they are resigning their membership of the golf club doesn’t mean they’ll lose access to any of its facilities.  They’ll still be able to use the driving range; the 18 hole course; the restaurant and the bar.  So they’ll still get all the networking advantages too.  The weekly family trips aren’t going to stop.

Nigel’s family seem strangely skeptical about this argument.  How will they get access to the facilities if they are not members.  There is the possibility for non members to use the facilities - for a daily fee.  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 paying the annual membership fee.  Visitors paying the daily fee still have to abide by all the niggling little club rules when they are at the club.

Nigel is absolutely amazed to hear this rebuttal.  Don’t his family realise how business works.  Once he is no longer a member, he’ll be able to negotiate his own special rate.  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.  So he’ll be able to negotiate terms that wouldn’t necessarily be available to others.

His family are still sceptical.  Will they want our business that much they ask?  They might be a bit hesitant to give us special terms, wouldn’t they think it was dangerous to set that kind of a precedent?

At this point Nigel gets frustrated and and a bit angry: "of course they won’t mind about setting the precedent!" he exclaims.  Afterall, we buy a hell of a lot more from them than they buy from us!

At this point, his family look at each other and just say “yes dear”.  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.

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:  

• 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.   
• If they put up a fight, try to negotiate your own special rate.   
• See how far you get…

 

Bayes' Rule and Political Inference

Consider a question such as: Would politician A be a good leader or not?  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.

Suppose an individual’s prior belief that A is a good leader is p, and their prior belief that the newspaper endorses a politician who is a good leader is q.  Once the news arrives, the newspaper will either endorse A or not.  If they do not endorse A, then the individual’s posterior probability that A is a good leader will be:

p'= p(1-q)/[p(1-q)+q(1-p)]

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:

q'= q(1-p)/[p(1-q)+q(1-p)]

Afterall, once the newspaper does not endorse A, either A is not a good leader or the newspaper does not make good endorsements. 

Suppose that the newspaper is a source that we would normally trust reasonably well, q=0.75.  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 p=0.99.  Then as a result of the newspaper’s lack of endorsement for A, a bit of doubt will creep in, and  p'=0.97, but by far the biggest movement is in the probability that the newspaper endorses good candidates and doesn’t endorse bad ones as q'=0.03.

What if the newspaper endorses the politician?  Then the posterior probabilities in this case will be:

p''= pq/[pq+(1-p)(1-q)]

q''= pq/[pq+(1-p)(1-q)]

Similar results obtain if the individual detests the politician in question, and believes, with semi-religious fervour, that they are not a good leader.  Suppose that q=0.75, and p=0.01, and the newspaper endorses the politician.  Then the posterior probabilities will be p''= q''= 0.03.  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.

The lesson?  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.

Can Tax Avoidance Save Housing Associations From "Right to Buy"?

So the Conservatives are pressing ahead with their plans to extend the right to buy to tenants of Housing Associations.  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.  The right to buy your council house was part of what led local councils to stop building council houses.

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.

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.  Others have already written eloquently about how Housing Associations fund their home building activities by borrowing against their existing asset base (see Martin Wolf in the FT in particular).  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. 

State confiscation of this sort is essentially little different from a tax.  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.  Who has been particularly good at avoiding tax, and is there anything that Housing Associations might be able to learn from them?

The essential point here is that the “Right to Buy” will never to extended to the tenants of private landlords.  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.  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.

One way to do this would be to transfer all the houses owned by the Housing Associations to some private company.  The Housing Association would then lease the properties from this company and sub-let them to their tenants.  All of these rental agreements would, of course be happening at sub-market rents.  Right to Buy would not then apply as the Housing Association cannot sell to the tenant what they do not own.  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.  

Of course, elaborate legal arrangements would be needed between the Housing Association and the firm that owns the houses.  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.  

One solution might be to turn the  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.  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.  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.  Some structure would have to be constructed where the firm was effectively owner-managed.

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!  I merely wish to suggest that such an arrangement should be possible.  Afterall, since the “Right to Buy” is effectively an asset tax, it should be as liable to tax avoidance as any other tax.  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”.

To Control Letting Fees or Not To Control Letting Fees ... Really Isn't the Question

The coalition has frequently trumpeted their “help to buy” policy where the government guarantees the mortgage of someone buying a new home.  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.  See my analysis here.  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.

The policy in question involves banning letting agent fees.  First of all, let’s look at the scale of the problem.  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.  Labour’s research (reported here) suggests that these fees average £902 across the country and £1,700 in London.  This may sound like a lot, but compared to the average cost of renting, is it?

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.  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.  On the outskirts here means just inside the Ring Road.  I’m not going to claim I have found the average rental price in these cities, but this will give us an idea

• Oxford: This 3 bed semi costs £1,500 pcm, so fees would be 5% of annual rental cost. 
• Bristol: This 3 bed flat costs £1,395 pcm, so fees would be 5% of annual rental cost.
• Southampton: This 3 bed semi costs £925 pcm, so fees would be 8% of annual rental cost.
• Manchester: This 3 bed house costs £1,495 pcm, so fees would be 5% of annual rental cost.
• Birmingham: This 3 bed house costs £1,000 pcm, so fees would be 8% of annual rental cost.

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.  In London, this 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.

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.  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.  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.  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.  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.  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.  

The  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.