Better than Half Price!

A short while ago my local Sainsburys had some lovely looking Scottish raspberries (yum, yum, my favourite!) with a big red sticker advertising them to be ‘Better than Half Price’.  Could this be too good to be true?  Probably!

My analytical side kicked in;  was ‘Better’ to be construed as meaning better for me, the customer, or better for Sainsbury’s shareholders?  Probably the customer I concluded but my wife insisted that it was strawberries we needed anyway.  Fortunately the strawberries were unambiguously ‘Half Price’.

But then I reflected what does ‘Half Price’ mean anyway in the context of a highly seasonal product?  Is it half the price of strawberries flown in from halfway round the World or half the price of strawberies grown in the UK in midwinter or what? 

In reality since they are packed specially for Sainsburys there is no reference price to be half of and Sainsburys can claim whatever it wants.  In the end we decided to go instead to our local independent greengrocer where a slightly larger punnet turned out to be substantially cheaper even though it was full price!

The week before it was lager.  They had a huge pile in a prominent location labelled ‘Manager’s Special’.  Great! I picked up a pack but then thought to check it against the price on the ordinary shelf (a slightly different pack size).  Good call - the ‘Manager’s Special’ was far more expensive.

Yesterday it was printer paper at WH Smith who were advertising a ream as ‘Half Price – Only £3.49 – formerly £6.99′.   It’s a while since I bought any, but I remember that when I did it was the exact same brand at £2.99.  Naughty, naughty!     

And so it goes.  To be fair I’m not picking just on Sainsburys or WHS here.  All the supermarkets (and indeed ‘Big Retail’ generally) are up to these tricks.  I go to Sainsburys because I dislike it less than Asda which is the next nearest.

However you slice it this is a deceit - and not just a minor or accidental one at that.  It’s a systematic, organized and large-scale deceit on the consumer perpetrated with the intention of fleecing him or her of the maximum amount of money while masquerading as the patron saint of low prices.

Which raises an important question.   In a liberal democracy is it acceptable for systematic deceit to be an organizing principle of a major industry, especially when it is quite clear that this is largely at the expense of customers and suppliers alike?

I think not.

Gas – Unfair at any Price

British Gas owner Centrica’s announcement of £992 million profit for the first half of 2008 only a day after putting up gas prices by an eye-watering 35% has caused predictable howls of outrage and calls for a windfall tax from left and left-leaning politicians.

This would be a mistake.  In fact only 17% of the profit is due to retailing residential gas with the vast majority coming from ‘upstream’ – i.e. producing gas from fields in Morecambe Bay and the North Sea – even though this is a relatively small part of the business.  British Gas is not allowed by law to subsidise its residential sales from upstream profits even if it wanted to for fear this would give them an unfair advantage in the market.  In the medium and long run it is far more important that they and others like them have the incentive to invest in additional energy supplies (especially renewables) that will eventually bring prices down again.

As has been observed often before, the cure for high prices is high prices.

But there is also a political issue.  The implication of a windfall tax is that the Government can redistribute it to those in fuel poverty.  This sounds perfectly fine but unfortunately it doesn’t work.  Energywatch recently said that social tariffs reach only 1 in 15 of the most vulnerable households.  And that’s before factoring in the huge bureaucratic cost involved which the country can ill-afford. 

Socialist solutions sound great but unravel when you look more closely.

However, I am very uncomfortable with the whopping £144 per annum extra paid by those on pre-payment meters compared with the relatively affluent on direct debit.  This is the result of a paradigm that says each of us should have maximum choice in each and every area of our lives.  But why?  As it happens I have just fixed our own household energy prices well ahead at the old price so I am able to be perfectly relaxed about the coming winter, but for every winner there will be several losers.  Moreover, the multiplicity of deals on offer from the energy companies makes the market quite remarkably opaque.  A good system would be one accessible to all in society and not just those with more money and/or education.

It is no surprise that society is getting more unequal under Labour.

As an alternative, why not require the energy companies to have just a single transparent tariff for all residential and small business customers (except perhaps insofar as they could demonstrate a genuine difference in the cost of supplying that customer – i.e. a set amount for the additional cost of a pre-payment meter).  ‘Choice’ would be reduced but transparency and fairness would increase dramatically, the energy companies would save a bundle on sales and marketing (and I for one would be delighted to see no more of their salesmen!!) and there would also be multi-million pound savings from not having to pay off comparison websites (I understand that each switch nets them circa £40 so their interest in promoting ‘churn’ is understandable) which would find its way back to the customer in lower prices.

And finally, with ministers and senior civil servants in the same boat as ordinary people it might just concentrate minds that need to be concentrated on, for example, why energy prices are now so much higher here than in Europe even though we have more domestic supply than almost any other EU member.

Small Earthquake in the Energy Market

Liberal Eye is feeling ever so slightly smug today.   The House of Commons Business and Enterprise Committee has been grilling the bosses of the big energy companies about rising prices and concluded as I blogged last week that the energy market is simply not working properly.  Its Chairman, Peter Luff, was all over the media yesterday with their conclusions – click here or here (audio) for details.

The MPs agree that there is no evidence of price collusion among the big six energy suppliers but note that it’s easy for each to predict what the other five are going to do on price and conclude that:

It is clear that there are very real problems in the energy markets at all levels … which need to be addressed.

In particular they are concerned that the established players are preventing new competition emerging, that UK consumers are paying more than those on the Continent and that there is a massive disparity between prices charged to those in fuel poverty (most of whom are apparently on quarterly credit tariffs and NOT on pre-payment metres) and an affluent minority who can afford to pay by direct debit.  Both Ofgem and the Government come in for sharp criticism.

In short, the MPs could hardly be more damming.

Liberal Eye notes that if you plan to take over British Energy for £12 billion you must have a pretty clear idea of how much you think its future earnings are worth and this in turn depends on future prices.  So if  two energy companies are jointly negotiating to take over a third there must have been a great deal of sharing of thoughts on prices.  This is sailing perilously close to the wind.  (The definition of a cartel is what precisely …?) 

At first glance this is the sort of story that a headline writer might summarise as “Small earthquake in Westminster – no-one Injured” .  However, this would be to wholly miss the real significance of this story.   The headline should read “Small earthquake fatally undermines dam foundations – creates crisis“.  The reason?  The Labour Government, like the Conservatives before them, have put their faith in creating competitive markets in the industries they privatised.  The market would, they promised, keep prices competitive and through its ‘dead hand’ protect the public interest with just the lightest of light-touch regulation to keep things on the straight and narrow.

This plan has now palpably failed and the market fundamentalists’ delusion stands exposed as a fallacy nearly 30 years after it became the dominant economic meme in the Thatcher/Reagan era.  That is why I regard the emergence of these problems in the energy market as fundamental.  It undermines the very foundations of the ‘market fundamentalist’ cognitive policy that has shaped politics over the last 30 years.  (In passing it’s worth noting that similar issues exist in other sectors - banking, retail, public transport etc.  The public are again the losers paying greatly over the odds for most of what they buy).  The Government will, of course, soldier on trying to patch and mend as they go but it will be to no avail.  It is effectively impossible for a Government to change cognitive policy mid-term so we must wait for a new one.

So here’s a prediction: whichever Party first manages to articulate a convincing alternative to market fundamentalism will sweep all before it.  But will this be the Conservatives who like to think they understand economics (but got us into this mess in the first place) or the Lib Dems who tend not to like to think about economics at all (thus securing their record as easily the most unsuccessful Party of the twentieth century)?

Needed: better regulation

For as far back as my political memory goes ‘regulation’ has been a dirty word.  Of course, this hasn’t stopped politicians reaching for new regulations and regulators at every opportunity (would it be too cynical to say in response to every tabloid headline?)   

Unfortunately the QUALITY of regulation is not matched by the QUANTITY and as a direct result the government has problems at every turn.

First to blow was Equitable Life on which the Parliamentary Ombudsman has just reported.  As Paul Braithwaite of the Equitable Members Action Group (EMAG) put it:

The UK regulators were fully aware for a decade that Equitable Life was effectively insolvent, yet they allowed the company to suck in another £20bn in pension contributions from more than a million new investors.

Quite reasonably they want some of their money back.

This is hardly small beer, but only a curtain-raiser for the credit crunch that broke open last summer.   This is the direct result of the fact that for many years major banks were operating what amounts to a Ponzi Scheme - a fraud involving paying abnormally high ‘profits’ to investors out of the money paid in by later investors rather than from any underlying real business profit.  Needless to say the regulators are supposed to stop this sort of thing but appear to have been too busy checking the petty cash to notice what was going on leaving the banks free to devise cunning ways to wriggle free of any regulation so that much – in some cases most – of their business escaped the regulators.   Inevitably this has ended in tears; we are all poorer as a result and will be living with the consequences for years to come.

Then just yesterday the BBC carried this story reporting that the lack of certainty over the value of university degrees is “descending into farce”.   This involves far less money but is perhaps the most serious of all for it strikes directly at the life chances of a generation.  All of us, students, taxpayers and employers alike, should be able to rely on the fact that a British degree means what it says on the tin.  Anything else is tantamount to fraud.

So what conclusions do I draw?  Simply this; we need good regulation for the safe and efficient functioning of the the complex world we live in.  But not too much or quantity will drown out quality.

Not such Good Value

We all know that British supermarkets are highly competitive and give outstanding value for money.  And how do we know?  We know because they told us so.

 

If you smell a rat you are right.

 

What we actually have are 4 near-identikit firms who maintain an illusion of competition but actually have no real interest in duffing each other up and every interest in maintaining a system that suits them just fine.  What they actually do is to use their size and power to roll over and squelch any upstart competition that emerges so ensuring that real competition is minimised and that they are left with free reign to beat up their suppliers and achieve ever greater margins.

 

As Cheshire dairy farmer Ray Brown told the BBC:

 

“If you [the farmer] are lucky you get 26-27 pence per litre, it’s the same price as we were getting 11 years ago.

 

“Supermarkets have a big score to settle there. The consumer then was paying 40 pence per litre, currently they are paying 57-58 pence.”

 

He’s absolutely right.  This means that consumers are being overcharged by a minimum 45% by the supposedly ‘competitive’ supermarkets (and that’s only using the reference point of 11 years ago).  Could there be any clearer evidence of market failure?  Could there be any clearer justification for a strong anti-monopoly response from Govt?

 

I think hard-pressed families (and farmers!) deserve some answers and some action.

 

In this context the publication yesterday of the latest investigation by the Competition Commission is yet another depressing example of the utter uselessness of the established system of regulation (see also Northern Rock etc).   Predictably, and in line with established form, the results will not worry the supermarkets.  Not that they actually wrote it as such but they do seem (as David Boyle suggested recently in this excellent piece on monopoly) to have successfully framed the issues in ways that play right into their hands.  It’s appears that in the rose-tinted World of the Competition Commission the supermarkets are basically virtuous and hence deserving of all possible support—which they are naturally pleased to give with just the lightest possible rap on the knuckles.

 

For instance a principle plank of the CC’s proposals is that planning applications for new stores or store extensions should be made subject to a ‘competition test’.  At first this seems reasonable until you stop to think that using Planning to address a Competition issue is basically barmy.  Moreover, it does nothing to address established local abuses—for instance Tescopoly reports that Tesco is the dominant retailer in 67% of postcode areas and has a greater than 50% market share in 5 areas.  (In contrast note that the CC had earlier concluded that over market shares of over 8% lead to abuse).

 

Another main plank of the CC’s proposals is that a supermarket ombudsman be appointed to oversee and where necessary enforce a stronger code of practice for dealing with suppliers.  Predictably the supermarkets are engaging in heavy breathing and talking ominously of costs of “hundreds of millions … which could be passed on to the consumer”.  To say this is a bit rich in view of their soaring margins on for instance milk is an understatement.

 

Actually, I too am opposed to the idea of a revised code of practice but for a very different reason.  It’s an administrative solution for a problem that requires a market solution and as such it simply won’t work for its intended purpose—although it might well provide lots of new civil service jobs!

 

David Boyle is absolutely right—Lib Dems should make this issue their own.

No Moral Compass

One of the curious features of the sub-prime crisis is why no-one in authority seems to have spotted what was going on and stopped it before it got out of hand.   After all, it doesn’t take a financial genius to realize that something is wrong when loans are made with complete disregard for ability to pay – hence the description of some borrowers as “NINJAs” (No Income, No Job, No Assets) – coupled with widespread evidence of predatory lending practices ranging from gross misrepresentation to illegal kickbacks.

Whether the primary motivation is consumer protection or regulating the financial system the answer has to be the same: this is dangerous, possibly even criminal.

Now it turns out in an article written by Eliot Spitzer shortly before the events that cost him his job as Governor of New York State that the growing sub-prime scandal was spotted in good time.  In fact the authorities in all 50 states took action to curb predatory lending ranging from litigation to legislation but unbelievably were prevented from doing anything by the Bush Administration.

Indeed the Bush Administration went so far as to promulgate new rules based on old legislation enacted for an entirely different purpose to prevent states enforcing their own existing consumer protection against national banks despite determined opposition from state authorities.

In the final analysis government must be a deeply moral activity; amongst other things, it must protect the weak and not allow itself to become a tool of the rich and powerful.  Without a moral compass it will loose whatever mandate it might have started with AND will also screw things up for everyone – including the rich and powerful.