Economies of bullying

The government has belatedly reacted to the long-running scandal of the supermarkets’ treatment of their suppliers by announcing that it will establish an ombudsman to enforce a new code of practice.  Unfortunately, it misses the point, is the wrong solution and won’t work.   The Lib Dem plan is little better.

Something certainly needs to be done; the market may perhaps have been competitive 20 years ago but it’s evolved into a very unhealthy oligopoly where a tiny group of companies sit astride the route to market for a significant fraction of the nation’s primary output.  As the supermarkets diversify this increasingly includes manufactured goods, not just food products.   Like medieval robber barons they are making a good living off their control of vital trade routes.  

What they say goes and they have become notorious for their high-handed treatment of suppliers; they long-since moved from the economies of scale to the economies of bullying.   The supermarkets justify their behaviour by saying that they merely aim to get the best price to pass on to their customers.  Like hell they do!   If you think you benefit just look at how, for instance, milk margins have changed over recent years.  

 

(If the details are hard to read click here for a link to the original.  Blue is farmgate price, red is processor gross margin and green is retail gross margin.  The timeline runs from Jan 1994 to Jan 2009)

Retail prices have risen by around 50% over the last 15 years and this is almost entirely due to a massive increase in retailers’ gross margins – the difference between their buying price and their selling price.  Over the same timespan farmers have done a splendid job keeping prices roughly level despite high cost inflation; the only substantial uptick in farmgate prices in over ten years was in 2007 as a result of soaring fuel prices.  The only winners in this business are the supermarkets; consumers are emphatically not winners.

This has come about because in the ‘markets are God’, ‘deregulated’ world we have lived in since Reagan/Thatcher, size is hugely important in retailing.  Of course, size isn’t the only thing that matters (and the big retailers are pretty smart and well-managed companies by any standards) but, other things being equal, if you are bigger than your rivals you can screw your suppliers for better prices leading to higher gross margins.   It may be only a few percentage points advantage, but in retailing that is a LOT; if maintained over several years it amounts to an unbeatable advantage and before long the bigger players are in a position to squelch and/or buy out some of their competitors and tighten the noose on the rest.  In simple terms that is why the two biggest firms, Tesco and Asda, have captured so much of the growth in the market.  The others struggle to keep up.

Moreover, the established players face little threat of competition from innovative new entrants or rivals with a different proposition – for instance higher quality or local produce or pack sizes tailored for one person households etc.  (There is a partial exception to this; foreign firms like Aldi and Lidl that are already powerful players in their home markets can make some inroads but I would like to see home grown competitors given the same opportunity).

So at one and the same time we have a market that is highly competitive in some ways and highly uncompetitive in other ways.   The big firms constantly push against each other – but only within limits; one firm might win customers by slashing the price of, say, milk, but they know that their rivals, with similar cost structures, would simply retaliate.  The end result of any such plan would be to shoot oneself in the foot so it rarely happens.   Instead what we get is a follow-my-leader situation where the biggest player, the one with the most buying power (Asda by virtue of its Wal Mart link), sets prices just a fraction lower than its rivals to keep the high ground while simultaneously maximizing gross margins.  The other players match prices where they can but commonly resort to confusion marketing - deals designed to obscure the actual price.  Hence Asda advertising tends to emphasis ’everyday low prices’, the others tend to advertise ‘offers’ and ‘deals’.

For suppliers the impact is life-defining, often life-threatening, so they have been the source of most complaints.  Customers are less aware; retail spending is only a part of their total spend, confusion marketing is a powerful weapon and supermarkets constantly advertise what good value they give while discreetly endorsing the notion that the alternative (and hence the benchmark) is the corner shop even though this is patently nonsense.  The debate is framed as suppliers (and small shops) wanting to push prices up while the (virtuous) supermarkets struggle to keep prices down.   

Progressives have made a huge error in not challenging this framing head on.   It has allowed the supermarkets to inflate their margins at the expense of both suppliers and the public.  They are protected from real change as long as the public believes that they are a ‘Good Thing’ because in a world of focus group-driven politics what masquerades as political leadership is actually just following public opinion. 

How much might the public benefit if the competition was working properly?  Aldi and Lidl claim to be around a third cheaper which is co-incidentally (or perhaps not!) exactly the same saving that customers would make on milk if gross margins returned to their former level.  The biggest winners of a more competitive market would be those on low and fixed incomes  because food is a bigger percentage of their disposable income.  These are the very people we should help most.  (A rhetorical question:  are trends in retailing part of the reason that inequality has increased so much over the last 30 years?)

Despite the failure to push back against the oligarchs’ clever framing, a background of mounting complaints has at last forced some action.  There have been several investigations since 2000 leading eventually to a referral to the Competition Commission and a report by them in 2008 recommending the establishment of an ombudsman to resolve disputes between supermarkets and their suppliers.   Just months before an election the Conservatives, followed by Labour have come out in support of an ombudsman, a move Tim Farron correctly dismisses as a “fig leaf solution”.  

Indeed it is.  It completely misses the point about retail margins and selling prices and there is no reason to think it will be an effective mechanism even on the supply side; the farming community is distinctly underwhelmed.   

Regulators, whose task it is to intervene in the market, are a poor tool at best especially when confronted by powerful and politically-connected regulees.   They are at perennial risk of regulatory capture and/or being neutered by a nod and a wink from government that itself has been captured by vested interests and only wants only ‘light touch’ regulation (despite what it may say for public consumption).   We have seen just how badly this can all go wrong with the financial meltdown; why would this case be any different?

The BBC reports (via the first link in this post) that the ombudsman is to have a budget of just £1.3 million per annum, only enough for a staff of perhaps 15 or so plus a modest amount of consultancy.   While I do not believe that size equals efficiency (often it’s the opposite in fact), this is simply not credible as a team to monitor thousands of suppliers and tens of thousands of products.   Moreover, even if suppliers’ complaints are initially anonymous, the ombudsman cannot investigate far without it becoming obvious who the complainant is and so risking retaliation by the supermarkets.  

The most we can expect is a handful of high-profile cases to ‘prove’ the ombudsman is effective while real change is deferred for another ten years.

Unfortunately, Tim Farron’s proposal is little better; his call for an ‘Independent Food Market Regulator’ is just a toothier version of the ombudsman and would suffer all the same drawbacks except that its very existence would imply a government more committed to action. 

Does that mean that the situation is hopeless?  Not as all; only that it requires a different approach but unfortunately this post is already too long so it will have to wait for another day.  (Hint: the root of the problem is that size is an important determinant of competitiveness – the large get larger and the small get smaller - until the market degenerates into an oligopoly that it no longer serves the public interest).

Fee and dividend – LVT for the environment

Just occasionally an idea comes along that is simply too good not to pass on.  So it is with James Hansen’s proposal for a ‘fee-and-dividend’ solution to controlling carbon dioxide emissions; it’s remarkably similar in concept to Land Value Tax.

Hansen points out that a successful approach must recognise a fundamental truth; that as long as fossil fuels are cheaper than alternatives their use will increase.  Lobbying against them may have some limited effect at the margin but in the scheme of things it amounts to shovelling fog. 

Hence the failure of Kyoto after which the global rate of increase in carbon dioxide nearly doubled according to Hansen.  In Europe the Emission Trading Scheme has been branded a scam after companies profited but emissions have not reduced while in the US Wall Street played a large part in devising the cap-and-trade scheme which is their equivalent and the big banks expect to make billions of dollars trading carbon permits.  These billions (plus the costs of operating the scheme) have to come from somewhere so in effect this is a tax on energy that will redistribute income from ordinary people to inflated City bonuses.  Great!

With the traders in charge its a racing certainty that the US market will prove as volatile and subject to political meddling as it already has in Europe; traders profit from volatility not from stability.  Yet individuals and companies need stability if they are to make sensible plans to reduce their emissions.     Moreover, many of the supposed benefits are illusory; manufacturers can evade the costs by simply moving production to developing countries while ‘offsets’ - alternatives to emission reductions - are often imaginary or unverifiable.  Hansen also argues that, in practice, cap-and-trade actually sets a floor on emissions; if they fall beneath the cap the carbon price collapses removing the incentive for further reductions – which is just what has happened in Europe.

All in all it’s quite unsupportable, especially when there is an alternative which is simple, elegant and avoids these pitfalls.

This is the ‘fee-and-dividend’ approach.  It works like this: the government collects a carbon fee at the mine or wellhead or port of entry for imports for all fossil fuels;  it is a simple, single amount – £x/tonne based on the contained carbon.  The whole of the fee income is then distributed to the public as a citizens’ dividend.  The price of goods would rise in proportion to how much carbon their manufacture, shipping etc. entailed so the public would pay, but only indirectly.    Companies would gain by the certainty and stability of the extra costs they would face and could plan accordingly.   A family with exactly average carbon consumption would net out, their dividend income exactly covering the higher cost of their energy intensive purchases.   Prudent people would gain at the expense of more profligate types by adjusting their lifestyle, choice of car and other purchases.   However, falling carbon consumption would reduce the dividend year by year so even the most prudent would have to keep cutting to stay ahead of the game. 

Hansen calculates that if the US introduced such a scheme and set the fee for contained carbon at $115 per ton it would increase the price of petrol by $1 per gallon and of electricity by 8 cents per kWh yielding a dividend of $3,000 per year to each adult citizen and that around 60% of voters would emerge as winners.  In practice it would be introduced gradually, with the fee escalating each year over perhaps 15 or 20 years so allowing utilities and others time to change their behaviour, build new plant etc. without causing too big a shock to the system so costs and dividends would never reach anything like these levels.

An obvious objection is that in the hands of Labour fee-and-dividend would mutate into just another stealth tax.  This must not be allowed to happen, nor should it be used to reduce National Insurance as some have suggested because this would only muddy the water.  I would even say that government should absorb the administrative costs from existing resources so that, quite literally, 100% of income would be paid out in dividends.  That would be refreshingly transparent!  

Under fee-and-dividend fossil fuel consumption and carbon emissions would fall as fast as new technologies were developed and deployed but there are other advantages that deserve a mention.

Firstly, many of the early winners would be the very people who most need help.  In effect, high consuming, 4×4 driving types would directly help those whose carbon footprint is limited by their poverty.  In other words, it would be a significantly redistributive measure.

Secondly, the certainty of a known and escalating carbon price would incentivize companies large and small to develop innovative low carbon solutions with the winners then ahead of the curve in developing export markets.  Ministers (and their shadows) love to talk airily of how they plan to promote ‘green jobs’ but it’s strictly BS;  laissez- faire policies have failed.  By contrast Germany, which was an early mover in pushing its industry in the right direction, has already got lots of green jobs – for instance the turbines for the London Array will be German while we struggle to persuade foreign firms to set up here.

Thirdly, although the climate change argument has provided the primary impetus towards carbon reduction, not everyone is convinced by it.   As it happens, we must in any case reduce our addiction to fossil fuels because of the looming threat of peak oil quite independently of any belief about climate change and this provides the basis for building a broader coalition in favour of action.   Fee-and-dividend will push the economy in the right direction.

One for the FPC I think.

Freedom matters

As a Liberal a belief in the importance of freedom has always been pretty central to my political philosophy.  There are many reasons why I dislike the authoritarian instincts of Conservatives or the meddlesome top-down approach of Labour but many of these come back to the central importance of freedom in the final analysis.

I’m not fundamentalist about it - freedom is not the only value in my universe - but without a large measure of both political and economic freedom we are all poorer – both literally and metaphorically.

So I naturally agree with a cry for freedom that reminds us that, 

The founding texts of the English Constitution – charter, petition, bill of rights – have one thing in common: they create nothing.  They assert old freedoms; they restore lost harmony.  In this they guided America’s Revolution, itself a codification of earlier colonial liberties.”

But herein lies a difficulty.  For the author is Ambrose Evans-Pritchard writing in the Telegraph of all places and the subject of his attack is the Lisbon Treaty which came into force earlier this week.   As he puts it,

Europe’s Constitution – the Lisbon Treaty, as we know it – began as a sort of Magna Carta.  EU leaders agreed at Laeken in 2001 that the Project needed restraining…   People do not want Europe inveigling its way into “every nook and cranny of life”, they said.  Needless to say, insiders hijacked the process …  The text says much about the heightened powers of EU bodies, but scarcely a word to restrain EU bailiffs and constables.

The Charter of Fundamental Rights … asserts that the EU has the authority to circumscribe all rights and freedoms…  In other words, our Magna Carta has been superceeded.

He concludes that in doing so the EU has crossed a subtle line and is no longer legitimate.  I agree.

And for my money that precipitates the EU into a crisis – but it is a crisis of ideas as well as of legitimacy as the Economist’s Charlemagne blog pointed out this week in a post headed “Europe: where are the big ideas?”   He quotes with approval Jacques Delors, the former European Commission boss,

“But we are not making any proposals … and to propose something, there has to be much more co-operation between us.  But no, everyone is in their own corner. Germany is run from Berlin, France has turned into “Greater France” and Britain is more and more anti-European…  If Europe does not take care, within ten years we will have a world run by two powers: the United States and China.”

He goes on to quote Poul Nyrup Rasmussen, president of the Socialist Group,

“The old democratic contract is broken. Globalization has taken sovereignty away from the nation state, leaving people vulnerable to forces outside their control. Europe is the only means to regain this lost sovereignty and to empower people once more. But if we do not act now, the danger we face is the withdrawal of democratic consent from the European project. It will happen slowly but surely if we do not change the way we do politics.”

 Perhaps the best summary comes from one of the comments (rewt66),

It seems to me that there are two Europes.

There is the Europe of the liberal democratic tradition, of the rule of law, of stable institutions, and of transparent and accountable government.

And then there is the EU, which essentially decided to force a constitution down the throats of those that didn’t like it. (“Ireland voted against? That’s unacceptable. They’ll just have to vote again. Nothing will be permitted to block this constitution – certainly nothing so trivial as a democratic vote!”) The EU creates a maze of bureaucracy (so much for transparency) and removes the decisions further from the people (making accountability harder).

It seems to me that the EU is, if not diametrically opposed to the best traditions of Europe, then at least not fully in keeping with them.

So what is going on?   In which direction does salvation lie?

The answer, I suggest is that we must rediscover our ancient freedoms and insist that the EU is remodelled to comply with them.  It means a Europe where power is clearly understood to be delegated upwards, not downwards and where bureaucrats are servants, not masters – in short a Europe where democracy (and hence legitimacy) is restored.

All of which is a little difficult for the Liberal Democrats.  In theory the party is fully subscribed to the idea that freedom should be a guiding principle, in practice the it is so clueless it has blundered into supporting the exact opposite.   Tragically, Nick Clegg and his coterie have not understood that there are different ideas about how Europe should work; instead of working up alternative proposals based around freedom and democracy they have naively swallowed the establishment party-line that ‘there is no alternative’ (shades of Margaret Thatcher) and, in limply surrendering to the establishment framing, they have lost the battle.

It has also left the Liberal Democrats in a terrible mess as a party that thinks it believes in freedom but actually promotes the opposite.  

We have by far the best and most trusted economic brain in Parliament at a time when that really matters, we regularly win local elections all round the country and the two big parties both looking utterly unconvincing;  yet despite all this we are nevertheless managing to flatline in the opinion polls?  Is there a connection between this lack of support at national level and our muddled message on freedom.  You Bet!   Not that it’s the only factor, but it’s certainly an important one and if we want to move forward and actually be a liberal party it’s one we have to resolve.

For one thing is certain; the ancien regime is dead – the political leadership is preoccupied with chasing poll ratings, the bureaucrats are consumed by office politics and the theologians have gone for the intellectual drivel that is neoclassical economics.   Do we, as a party, want to join the dead establishment or lead the revolution?   If the latter, we must lift our game but I see little evidence of this so far.

Human resources or human assets

Paul Krugman argues that US jobs policy is deficient in that there really isn’t one.  As he puts it,

Here in America, the philosophy behind jobs policy can be summarized as “if you grow it, they will come.” That is, we don’t really have a jobs policy: we have a G.D.P. policy. The theory is that by stimulating overall spending we can make G.D.P. grow faster, and this will induce companies to stop firing and resume hiring.

He compares this with the German approach which is to provide a short-term work scheme which provides subsidies to employers who reduce workers’ hours rather than laying them off – an approach that didn’t prevent recession but which meant that ”Germany got through it with remarkably few job losses“.

One might quibble with the implication that the recession is over but Peter Dorman points out that Krugman misses the really important point about Kurzarbeit.  While giving Krugman credit for seeing the deficiency of the slash-and-burn approach to labour; Kurzarbeit is fundamentally about human capital.

But this is not the main reason Germany has an institutionalized short-work (that’s the translation of Kurzarbeit) program. The Germans have this strange belief that working builds skill: you go through an apprenticeship, you work with master craftspeople, you learn the subtle ins and outs of the particular firm you are attached to (in German you work “with” and not “for”), and lo and behold you become more productive. The key purpose behind Kurzarbeit is to not lose this accumulation of human capital.

Krugman adopts the conventional ‘Anglo-Saxon’ view that European-style employment policies are bad for long-run growth and that in “normal times” there is something to be said for labour markets in which employers are free to hire or fire at will but Dorman gives this view short shrift.

In normal times the US runs a massive trade deficit with Germany, unable to compete in industry after industry on quality-price comparisons. Labor in this country is strictly an expense, not an asset, and therefore quickly shed when sales go down. Note Krugman’s language: it is “occupations”, not workers who are productive. Even our most knowledgeable pundits can’t imagine an economy in which the skill of the average worker is the main competitive advantage, the last resource you would want to shove out the door.

So , do we in Britain have a GDP policy, a skills policy or simply a make-it-look-good policy? 

 

Learning from the BBC

How many senior managers does it take to run the BBC?

Apparently it’s quite a lot less, 18% less to be precise, than previously thought according to the BBC Trust which has agreed to proposals from the Executive to cut the senior management pay bill by around 25% over the next three and a half years.

Other savings will come from freezing pay and bonuses for senior management until 2010 as part of a larger plan to cut a whopping £1.7 billion from costs between now and 2013.

Wow.  18% less senior staff!  Savings of £1.7 billion.  What a veritable feeding trough this must have been in recent years; a perfect illustration of how the interests of senior staff can diverge from that of the organization and its shareholders (the public in this case). 

Actually the salary and bonus savings are likely to be just the tip of the iceberg.   The primary cause of inefficiency is not too many staff and an inflated wage bill, bad as that is, but the organizational constipation they cause as they get in each other’s way.  All those staff have to do something, and when there are too many of them they invent work, creating endless and pointless meetings and paperwork, hoarding information, diffusing responsibility and playing (company) politics.   Trust me, I’ve been there, I’ve got the tee shirt.

But if the BBC is top-heavy and over-managed, what of central government?   I suspect the BBC is positively slimline by comparison.  Think about it; most long-established major industries have in turn experienced an existential crisis which has forced root and branch reform – think shipbuilding, coal, steel, motor manufacturing, telecoms and so on.   Some have failed to make the change, others have gone on to thrive (though often under foreign ownership).  The one obvious holdout, protected until now by the endless generosity of the taxpayer, is government.

Well, this party is about to end.  A country needs a government just as a large and diversified company needs a head office but it must add value and it can only do this if it is small and efficient.  If it gets too large it becomes inefficient and self-serving and subtracts value.  That sadly, is what HMG too often does.

Which is why I have always disagreed with the plan to save $20 billion from government spending.   It’s simply too small; it implies leaving the system basically unchanged and making it just a bit more cost-efficient round the edges.  For heavens sake!  If the BBC can find £1.7 billion after a few months what is the potential across government?  £200 billion is probably nearer the mark because that implies a root and branch change in the way government works.

It’s long overdue.

 

How unfriendly prices can damage your wealth

Quickly now, at your local supermarket which is better value - 4 rolls of paper towels for £2.79 or 6 for £4.29?

Most people take some pride in being careful shoppers but it’s not easy when you have to do sums like that in your head (especially if you have a fretful toddler in tow).   These are what my wife, a chartered accountant, calls ’unfriendly numbers’ meaning ones that don’t lend themselves to mental arithmetic.   

This is no accident;  you’re not supposed to compare them because unfriendly numbers and similar tricks are at the heart of the ‘trick and trap’ sales strategy now universally used by Big Retail.   The objective is to induce customers to overpay by confusing or misleading them about the price of items and, in particular, which about choices are best value.  

Although there are laws against misrepresentation Big Retail has discovered you can comply with the letter of the law while frustrating its purpose by exploiting psychological tricks.  These tricks don’t fool everyone all the time but they don’t have to.   It’s a matter of averages;  as long as they work for some people some of the time they serve their purpose and my guess is that they actually work for most people most of the time. 

Nor is it just supermarkets that resort to price confusion strategies;  it’s endemic in many sectors.  Did the banks selling worthless securitized sub-prime loans really want price transparency whereby their customers would have understood the real value of what they were buying?   Do you really understand your telephone bill?  (Do you think you are supposed to?)   Confusing customers about true value is one of the oldest tricks in the book.  

Just how effective this can be in the case of supermarkets was dramatically illustrated by the BBC’s Watchdog consumer program this last week (video – package begins at about 40 minutes).   They arranged for three couples to buy a list of just six items as cheaply as possible from a mocked-up supermarket stacked with retailing tricks taken from real life.   The cheapest it was possible to buy the list was just £11.96 but the three teams spent £14.52, £21.10 and £21.27 – equivalent to truly eye-watering premiums of 21%, 76% and 78% respectively over the best possible price.   While this obviously wasn’t a properly conducted scientific test it does show the effect of this chicanery is pretty huge.  Moreover, it’s reasonable to infer that it will disproportionately trap those lower down the social (and educational) scale.   

Watchdog’s package concludes with a spokesman from the British Retail Consortium (the lobby group for Big Retail) trying very unconvincingly to blame it all on ‘mistakes’.   The fact is that when your sales are in billions making just 1p more in every pound become hugely profitable and the supermarkets have a massive incentive to turn deceit  into a strategy.

Is it possible to estimate, however roughly, the scale of excess revenues garnered by the supermarkets?   Obviously not from Watchdog’s little test of the efficacy of ‘trick and trap’ which is, in any case, only one of many strategies employed.   However, we can get one estimate of how much cheaper supermarkets could be from Aldi and Lidl both of which claim to be around a third cheaper than the established competition.  Combine this with supermarket sales of around $90 billion and you get excess revenues of £30 billion – equivalent to a staggering £500 per annum for every person in the UK.

Is this a reasonable figure?  The supermarkets and their apologists would obviously say not but Im going to stick my neck out and say that, for all that it’s a bit approximate, I suspect it’s about right.   But even if it’s a substantial overestimate, it still dwarfs anything the government has yet come up with to help ordinary folk as opposed to bankers.  

Oligarchs or people: hopefully that will be the choice at the next election.

By the way, the answer to the question at the head of this post is that the 6-pack costs 2.2% more than the 4-pack on a per unit basis.

Stuck in a rut – but we can break free

Mark Thompson asks why we’re not doing better in the polls.   As he observes we are in the worst financial crisis in most people’s living memory, the government is deeply unpopular and out of ideas, politics itself is in crisis and politicians are seen as remote and untrustworthy;  yet for all this the Liberal Democrats are stuck at only around 20%, in the polls.  Clearly, something is very wrong.

The difficulty as I see it is that we have got stuck in a rut, winning a measure of success as a (largely) protest party, but with little idea of how to get out of the rut.  So, where are we going wrong and what do we need to change?  

There is so much one could say on this subject that I will confine myself for now to just two things that we should stop doing.    In a later post (or maybe posts) I will consider things we should do differently.

Firstly, we should stop complaining about the unfairness of the media and the voting system.   Of course they’re unfair (what do you expect?) but if we use that as an excuse it  becomes all too easy to stop right there and never get on with the things we can do.   If we had a coherent understanding of where the the country was at and what we would do about it, we would certainly get reported.  Vince Cable has shown that this works; unfortunately he is seen as a sage distinct from the wider party.  The conclusion is surely that developing a compelling narrative is a top priority; once this is done the ‘media problem’ will solve itself. 

Secondly, we should stop being so complacent.  After the last general election and yet another bad defeat, the Tories debated briefly what their strategy should be.  They all agreed (after debating in very much these terms) that it came down to a straight choice between (a) a radical reform of their platform, and (b) a ‘one more heave’ approach.   Almost without exception Conservatives from all wings of the party understood from the outset that the ‘one more heave’ strategy was, in fact, a hiding to nothing and that they had to change, distasteful as it might be to many.  The issue for the ensuing leadership debate was then what sort of change and, as we now know, that was won by Cameron.   His platform?  An superficially greener, more liberal interpretation of Conservatism based on an accurate perception of a gap in the market created by the weakness of the Liberal Democrats rather than on any ideological conviction.

Contrast this with the response of the Liberal Democrats;  we had no debate but just blithely assumed that, of course, it was back to ‘one more heave’;  it’s what Liberal Democrats do, it’s what we’ve always done.   In doing so we effectively surrendered any chance of winning the forthcoming election preferring instead to reheat and represent policies that voters had just rejected by a large margin.  Only now, belatedly, are we beginning that debate.  (Which makes me think that the election after 2010 might at last be the breakthrough). 

As Mark hypothesizes, this is the best chance we have had in decades.  It’s up to us whether we choose to throw it away or run with it.

Solar power nears the tipping point

Is photovoltaic (PV) solar power about to reach a tipping point and come of age?   A couple of announcements yesterday imply that it might be – and not just for niche markets and remote locations but for grid power – although sadly only in rather sunnier climes than Britain!

Arizona based First Solar has announced that it has concluded a memorandum of agreement with the Chinese Government to build a massive 2 gigawatt solar plant near Ordos City on the dry steppe of Inner Mongolia about 300 miles west of Beijing.   Construction will start next year with a 30 megawatt demonstration project and then proceed by stages until completed by 2019.  To put this in context that means that, when completed, this single plant will have a capacity equal to the entire UK fleet of wind farms as of January 2007.

Also yesterday, California based Nanosolar announced the opening of a new factory near Berlin to assemble finished panels from their PV cells.  When production is fully ramped up the highly automated factory will produce a panel every 10 seconds for an annual production of 640 MW.  All are destined for utilities and customer committments totalling $4.1 billion to date are claimed.   Nanosolar modules have been designed from the outset to lower the ‘balance-of-system’ costs – i.e. the costs of mounting, connecting etc. so that the overall installation cost is minimised.  They also revealed that their cells achieve up to verified efficiency off up to 16.4% although the median is a litttle better than 11%.  

Now PV has been around for a long time but its high cost has always ruled its use out except for niche applications.   To be a serious player it has long considered that vendors would have to get the capital cost down to around US$1 per watt and produce electricity at a cost of around 10 cents per KWh and yesterday’s announcements imply that both companies believe these goals to be within sight.

First Solar is relatively happy to discuss costs and claims that by the second quarter of this year its module cost had fallen to just $0.87/watt and it projects further declines to $0.52 – $0.63 by 2014.   At the same time it is working to reduce balance-of-system costs and is targeting a cost of $0.91 – $0.98 /watt, again by 2014.

These projected costs possibly explain the phasing of the Chinese project; half the contemplated capacity will be added in the final phase to start construction only in 2014 – i.e. only when costs are rather lower than currently.   In the meantime the Chinese have guaranteed the project’s revenues by means of a feed-in tariff which First Solar considers vital as they drive their costs towards ‘grid parity’ – where they become fully competitive with conventional sources.

Nanosolar uses a different technology and has developed a method of printing a thin film of semiconductor onto a flexible metal foil which it claims is 100 times faster than conventional high-vacuum deposition and which certainly ought to be highly cost-effective.   The company is coy about costs but claims that its utility panels are ‘profitable in a wide range of geographies and power markets’.   According to Wikipedia cell costs have been reported as only 36 cents /peak watt (which Nanosolar declines to comment on);  if even approximately correct this represents an amazing breakthrough and implies that they are already at the tipping point – or as near as makes no difference.

So what does all this mean for us in the UK? 

Firstly, I don’t believe we are going to get a significant development of solar energy in Britain.   We are simply too far north and too cloudy.   However, on a global scale it does begin to provide alternatives that will very quickly become important once grid parity (or even a reasonable approximation) is achieved. 

Secondly, it highlights that an immense immense amount of R&D is going on into alternative energy sources and that some of that is getting very close to commerciality.   While both these companies happen to work in the field of PV, others are making equally impressive progress in solar-concentrating systems (that use sunlight to create steam to drive a conventional turbine) and in nuclear.  I think it likely that 20 years from now electricity will cost less in real terms than currently. 

Thirdly,  the UK needs to do far more to create a favourable environment for R&D led companies.  Even now, while the Chinese are getting in at the ground floor, DECC is still consulting on a feed-in tariff system with a view to it being introduced only in April 2010.  (To be fair to Ed Balls, the announcement of his support in principle for feed-in tariffs was one of his first acts on becoming Minister – but that does not excuse the government’s prior tardiness).

Fourthly,  maybe we don’t need to worry quite so much about carbon dioxide levels in the atmosphere for the future.   We’re not there quite yet but we appear to be getting close to having technical alternatives to carbon-based technolocgies for generating electricity.  Although the total amount of PV out there is miniscule in comparison with conventional capacity, it will ramp up very fast once the economics favour it.

Supermarket cuckoos

Tracy Corrigan, who writes for the Telegraph on banking and the like,  is excited.   While walking her dog on Sunday she discovered that a Tesco Express is about to open, not 50 yards from her house.   She foresees a future liberated from the boredom of ordering the same items week after week online because she can’t think what else to buy.  Shopping in-store she will find all sorts of goodies.

She thinks her position is, “actually rather radical” and goes on to explain that there are numerous websites dedicated to the “negative impacts of supermarket power” (none are mentioned, but see Tescopoly) and declares she is mounting a counter-insurgency following up with the quite remarkable (and wholly unsubstantiated) assertion that, “The small number of large chains in this country makes competition more intense.”

Yet what is most interesting about this piece is the comments.   If you analyse them into pro on the one hand and anti or neutral on the other then, on a rough count, they divide nearly 2:1 against Tesco.  If you exclude the neutrals and overseas comments, then the antis have it by over 4:1.   Does this mean that things are about to change in Tescoland? 

I think it might.   Since the supermarkets first arrived here in the sixties they have benefited from a favourable political and commercial environment – albeit one that has evolved and changed greatly since then – and this has underpinned their success.   However, nothing stays the same for ever and the economic case for supermarkets in their present form evaporated some time ago.  Good PR on the part of the supermarkets, a widespread belief that the market is always right (or at least much righter than anything else) and the dreadful habit of UK politicians of all parties to follow rather than lead have protected the supermarkets from any political fallout from loosing the economic case.    While the comments on Tracy Corrigan’s piece don’t prove that public opinion has definitively changed any more than the first swallow proves that spring has finally arrived it is, nevertheless, a clue;  two years ago the balance of pros and antis would have been very different.    

To understand how and why things have changed consider the stages that have got them from then to now.

Stage 1.   Government policy was changed in the sixties to favour the growth of ‘big retail’.    The hope was that powerful retailers would force suppliers to deliver better prices and quality (at the time they had a deserved reputation for supplying shoddy goods).   A particular aim was (and is) ’cheap food’ – a policy that presumably dates back to the Corn Laws.   Thus, when the first supermarkets arrived from the USA in the mid sixties (remember the supermarket scene in The Ipcress File in which an early specimen is clearly the height of contemporary cool) they were welcome as a way of galvanising both the retail sector and also the rest of the supply chain.

Stage 2.  The supermarkets became established and a few pulled ahead of the pack, gaining additional market power with size and thus started delivering on their early promise as they used their market power to bear down on dozy suppliers and extract better prices.   Rapidly rising car ownership boosted this process mightily by enabling supermarkets to concentrate on fewer, larger stores as did the emergence of IT systems to manage on a larger scale.   The scale of each store is such that they could sell at prices approximating to wholesale although it is more profitable to trouser most of the benefit and give customers only enough to maintain a small price advantage.   Nevertheless, the gap between supermarkets and traditional shops becomes very obvious.

In other words, the supermarkets had the huge advantage of a lower-cost business model, enabled by rising car ownership, computerised stock control etc. and backed by supportive government policy.

Stage 3.  Government welcomes the rise of supermarkets as a vindication of its policy and comes to see supermarkets very much as a ‘Good Thing’, especially so since so much of the rest of the economy was in near meltdown (it turned out that big retail, instead of knocking domestic producers into shape, simply sourced from overseas).  Supermarkets stand out as one bright spark in the pervading gloom.  Meanwhile, the winners among them grow rapidly by a combination of organic growth and acquisition because it turns out that the most important factor for success is size (because of the increased buying power and therefore lower buying prices).   The contrast between supermarkets and surviving corner shops becomes extreme.

Stage 4.   The winning supermarkets are now an oligopoly, dominating their market and dictating terms to both suppliers and customers.  Suppliers notice this (of course!) but customers don’t as the supermarkets carefully maintain the illusion of good value helped by supporters who continue to benchmark them against surviving corner stores although this is patently nonsense.  They start moving into other sectors helped by their vast cash flow and footfall.  Voices start to be raised against them and their practices but these are mainly couched in nostalgic terms (e.g. they are horrid, are mean to suppliers, devastate the High Street, etc.).   Many of these are good points but none cut  much ice with a government (as distinct from many MPs) still wedded to the idea of a cheap food policy and naively convinced they are delivering it.   The supermarkets actively foster the ‘we are cheap, we are on the hard-pressed customers’ side’  meme by constantly advertising price reductions, BOGOF offers etc.

Stage 5.   Abuses of market power become the norm.   The much publicised unfair contracts with suppliers are the inevitable result of the concentration of buyers; with so few supermarkets growers confront an oligopsony.   On the selling side, BOGOF and other offers are used to confuse shoppers about what constitutes a fair price; absent resale price maintenance, marked prices purporting to be RRP (recommended retail price) are often no more than Aunt Sallys - deliberately intended to deceive.  This can only mean that consumers are paying substantially more than they should.   Moreover there is evidence of outright price-fixing (also here and here) which is almost inevitable when the number of competitors becomes too small.   Also on the selling side, predatory pricing is used to crush competitors as the All Party Parliamentary Small Shops Group has reported (pdf – see page 25).   The tactics are utterly disgraceful but they get away with it. 

In other words, the supermarkets commercial advantage now derives from exploiting their excessive market power and they have become oligarchs.   A Conservative friend (also a councillor and on his planning committee) concedes that they are above the law.   The fluffy fledgelings of yesteryear have turned out to be cuckoos to the bewilderment of their poor parents.

Stage 6.  Most people still believe the supermarkets’ claim to be benefactors which provides ‘high cover’ for them in that government will not act if it thinks they are still well-regarded by the public.   In any case, government and opposition have been captured by a market fundamentalist philosophy that persuades it that ‘the market is always right’.   In theory they should understand that oligopolies frustrate the workings of a market but in practice this view leads to them cheer-leading for any private sector firm, however abusive.   Calls for reform fall at the first hurdle because they typically propose administrative solutions  (for instance the creation of a regulator, ombudsman or Code of Practice) despite the incredibly poor record of such approaches.

Stage 7.  Regulators like the Competition Commission and the OFT (Office of Fair Trading) that might go after them for abuse of market power in fact shelter them, even acting as enablers on occasion – for example by allowing Tesco to make convenience store acquisitions that, given its high market share should be ruled out, on the spurious grounds that ‘convenience’ shoping is different from ‘one-stop’ shopping so Tesco doesn’t really have a very high market share at all!   

This is partly because, like the government, they are influenced by market fundamentalists and naturally assume that everything must be just dandy and in part because, as good bureaucrats, they believe that, whatever the law might say, the reality is that the Government approves of the supermarkets and doesn’t want to spoil the party.  (This are, of course, essentially the same reasons that the FSA/Bank of England/Treasury troika utterly failed to regulate the City!)   To be fair, the regulators are belatedly getting a little tougher, but only marginally.

So, we have arrived at a point where a Good Thing from a few decades ago has evolved into a Bad Thing today.   It suits the supermarkets mightily but it’s bad for the nation as a whole - producers are being ground into the mud and consumers are being overcharged.    The comments on Tracy Corrigan’s piece suggest a growing public appetite to do something – even if exactly what remains unclear. 

Time for a change I think.

After school – the black hole that swallows hope

The A-level results came out last week leaving many wondering about the significance of the 27th year running in which grades have increased and whether or not they still represent the ‘gold standard’ in school education etc.

These are perhaps interesting questions, but … are we missing the elephant in the room?  I think so.

The long-standing primary purpose of A-levels has been to act as university entrance exams common across the whole country.   Once upon a time that meant that they were designed to be attempted only by the 20%-25% most academically-gifted of the school-leaving cohort and ‘passed’ (in the sense of leading to university or polytechnic) by a tiny minority.   Thirty years ago this was around 10% but  it has risen erratically ever since.  When Tony Blair became Prime Minister he famously introduced a target of 50% and it now stands at about 43% with the government increasingly constrained by funding difficulties.

So, A-levels are still doing their primary job, albeit in a context changed almost out of recognition.   In doing so they provide a large MINORITY of school students with a clear goal for their school work.  Even though in one sense this applies only to those in the sixth form in reality the benefit of this clear goal riffles down into the middle school and even perhaps to primary.   I can still remember being distinctly bored by school aged around 14 but equally knowing that this was something I just had to get through because – well – because that was what one did on the way to getting A-levels, then to university and, in due course, getting a job. 

But … that leaves the MAJORITY of school students with no clear target for their school days.  It is a smaller majority than 30 years ago to be sure, but still a very substantial one.  For them there is a black hole instead of the comparative simplicity of A-levels.  What for them is the point of school?  It’s not entirely clear although (or perhaps because) generations of initiatives have left a bewildering array of options.  It’s a system that’s grown like topsy over the years; insiders may perhaps understand it but for ordinary mortals it’s far too complicated.

On last Thursday’s BBC R4 ‘Today’ program (the relevant bit starts 5 minutes in) Evan Davis put this very point to Higher Education Minister David Lammy, “It’s quite a complicated [system] isn’t it now.  We have A-levels and we have all these other things – everything from HNDs, NVQs, BTEC, City & Guilds….  When you got to the Department did anyone sit down and try and explain it all to you… ?”  and a little later, “…we seem to introduce one [a new qualification] every Parliament and never get rid of the old ones…”

The Minister did the normal political thing of answering another question so Evan came back with the thought behind his earlier question (at 7 mins in), “But you’re comfortable with the system?   It doesn’t need tidying up or anything?   It’s a logical and neat system?“  Again, the answer was to a different question leaving Evan to wrap-up by joking that, “We could introduce an exam in the different qualifications“

At this point I must declare an interest – or perhaps a prejudice – that dates back to my first job.  Head office imposed on our manual staff a bonus system of byzantine complexity that had been developed in another Division.   With our very different circumstances it was quite mad and led to perverse and illogical results, but worst of all, it was understood by almost no-one, and certainly not by the staff it applied to.   With the link between effort and reward no longer clear and transparent output slumped and cost soared.  Since then I have been a devotee of the KISS principle so I think Evan was right on the money when he implied that it’s not a logical and neat system and suggested that a tidy up is needed.  Make that a total overhaul.   The ’system’  for those not aspiring to go to university is not, in fact, a coherent system at all, but merely the residue of failed initiatives accumulated over many years.   

Both the individuals concerned and the wider economy suffer terrible damage from this wholly unsatisfactory approach.

Although I’m sure all the civil servants and ministers at the DCSF would hotly deny it, the reality is that young people are treated as statistical objects, gaming counters to be manoeuvred into desirable outcomes.   It is, of course, the archetypal producer-push approach that invariably fails in other sectors as it is failing here.   Moreover, the education establishment in Whitehall (and the education industry in the country) has a one-eyed view of education that sees ’academic’ as good and anything else as ‘failure’.   The ‘failures’ are treated just like the sports ‘left-overs’ at my old school - the not-very-sporty ones who would never play for the school football team.  Staff went through the motions because it was timetabled and they were paid but that was it; no passion, no energy, no inventiveness and certainly no attempt to discover the hidden talents that certainly abounded outside of  football. 

For the individuals concerned the damage was highlighted this report last week of the youth drop-out rate hitting new highs.  It seems that a shocking 1 in 6 or 835,000  18 to 24 year-olds are now NEETS (Not in Education, Employment or Training) after rising by 100,000 over the last year.   At this rate it will soon be 1 in 3 of those not likely to go to university.   But there is worse – recent research looking back at those who were NEETS 10 years ago discovered that 15% had already died.   Even if that figure proves to be very much less going forward, the human cost will still be incalculable.

Is it possible to overstate just how obscene this is?   I don’t think so, and that’s even before considering the economic costs to the nation which is immense as  young people who should be contributing socially and financially are reduced to dysfunctional overheads.

The establishment’s inability to comprehend the importance of vocational skills and do something about it is a traditional failing of the British political system - there has been a black hole at the centre of our economy since the industrial revolution.   As early as 1835 Richard Cobden wrote after a visit to America that “our only chance of national prosperity lies in the timely re-modelling of our system, so as to put it as nearly as possible on an equality with the improved management of the Americans.”   Then again just after the Great Exhibition of 1851 the scientist and Liberal politician Lyon Playfair observed that  European industry was bound to overtake Britain if she failed to alter her outlook and methods.  In 1882-84 the Samuelson Royal Commission on Technical Instruction visited many continental countries and reported, inter alia,  that “The one point in which Germany is overwhelmingly superior to England is its schools, and in the education of all classes of its people … the dense ignorance so common among workmen in England is unknown …”  (my emphasis).   In 1942 the Permanent Secretary to the English Board of Education noted that over a wide range of German industries there was  100% vocational training as against 10% for the UK.   (Sourced from Corelli Barnett’s ‘Audit of War’ ).

The educational establishment may be all at sea over non-academic alternatives but parents are not.  As the BBC reported only last week, “The majority of parents (90%) believe schools should teach vocational and practical courses, as well as academic subjects ...” and that, “…78% thought schools did not equip young people adequately for the world of work“.  Wow!   That’s way off the usual scale of political consensus.   The difficulty here is not parents or employers but the political establishment;  the Westminster Village (and I mean ALL parties) just DOES NOT GET IT any more now than it ever did.   Time and again unflattering comparisons have been drawn (the above are only a small selection) and yet invariably the establishment response has been either to ignore the evidence or, at best, to tinker round the edges.  When panics periodically erupt in response to the manifest system failure, the Westminster Village responds in the only ways it knows – by stretching traditional definitions of  ’academic’ to breaking point, by loudly announcing  ’initiatives’ and by throwing money at the problem in the hope that some will stick and that public disquiet will be appeased by evidence of action.

Sadly, the Liberal Democrats are not immune from this sort of failed thinking.  For instance in Policy Paper 92 “Thriving in a Globalised World - A Strategy for Britain” (pdf) (circulated recently with the Conference agenda) the section on “Improving skills” kicks off by waffling about the changes globalisation has brought to cross-border working patterns (paragraph 2.1.1 et seq.), goes on to discuss statistical changes to demand for unskilled labour and the difficulty of competing on wages with workers from the new EU accession states before making a raft of detailed policy proposals.  Some (not all) are fine, but taken as a whole they reflect a top-down approach, amount to yet more tinkering round the edges and simply don’t do the business.  

This needs to change.  Specifically Liberal Democrats should make a total rethink a top priority with a view to making a proper system a major plank of our platform at the next election.  After all, it might prove popular with the 90% of parents who already agree with this view!   And that’s not to mention employers and the rest who understand perfectly well that the existing system is badly broken.

Which just leaves one final thought:  a ‘proper’ system of practical and vocational training would probably be far cheaper and would definitely be far more cost-effective than what we have now so the financial case points us in the same direction.