Liberal Eye

I’ve just heard Shadow Chancellor, George Osbourne, claiming on Radio 4’s The World at One” that Britain now has the longest tax code in the developed world - a claim that I’ve no reason to doubt.

In a sense this merely serves to confirm what we already knew - that Brown is a ‘fiddler’ whose vision (although this is hardly the right word) is to sneak in a little stealth tax here or tweak some tax incentive there, all as part of his plan to work towards his socialist nirvana where everything is ‘controlled’ and everything is ‘fair’.

There’s just one small problem.  It isn’t working because it’s not capable of working.

For one thing it’s not fair: a vastly complicated tax code makes that quite impossible.  The only people who benefit are the super-rich who can afford high-powered tax advice and the tax experts who provide it.  Ordinary mortals are left out in the cold unable to utilize the loopholes that the rich can. 

For another thing it’s expensive:  it is equivalent to out-of-control overheads in the context of a commercial company.  And what’s the first thing a company in trouble has to do?  Cut overheads of course.

And finally it generates the illusion of economic progress and a growing GDP as all those expensive tax advisors work away but it doesn’t actually generate wealth.  Quite the opposite in fact as resources - both human and financial - are diverted from productive uses into an arms race with HMRC. 

Bring on flat tax (or at least a reasonable approximation to it).  It is fairer, costs less, and doesn’t divert resources from proper uses.

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.

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.

Some industries (air travel or motor manufacturing to name but two) are intensely competitive – it’s in their DNA so to speak.  Others, like most of the formerly state-owned monopolies that have been privatized over the years, operate in markets where there is little or no competition and monopoly is the rule.  So, from Thatcher onwards, successive governments have invented a whole raft of regulators to represent the public interest and substitute for the discipline of competition when these firms were privatized.

Sadly, it is abundantly clear that this strategy has failed, that regulators have suffered regulatory capture and that the new private operators are up to their collective necks neck in rent seeking from a long-suffering public.

BAA was privatized in 1987 and since then there has been growing dismay among airlines about its poor service and lack of customer focus which continued after it was acquired by Spanish group Ferrovial in 2006 for £10 billion of which a whopping £9 bn was debt - apparently with the intention of refinancing the deal once the new Terminal Five was completed.  Unfortunately for Ferrovial life is full of uncertainties – in this case extra security measures have raised costs and the credit crunch has put paid to hopes of a refinancing on advantageous terms.

 Also infrastructure costs are proving problematic. As the BAA website rather plaintively puts it:

“BAA believes, however, the Review does not recognise sufficiently: the scale of the task we are embarked on; the pressures of handling such large infrastructure projects; the full cost of the increased security requirements; as well as the impact of the credit market turmoil.”   

Are we really to believe that when Ferrovial acquired BAA they didn’t notice the half-completed Terminal Five or the dilapidated and under-invested state of some of the other assets?  It must have been quite a shock to the poor dears to find out! 

Fortunately for Ferrovial shareholders all is not lost.  The Civil Aviation Authority (CAA) has, like the proverbial US Cavalry, come galloping to the rescue with a bail-out at public expense and BAA is to be allowed to raise charges by 23.5% at Heathrow and 21% at Gatwick.  Ferrovial will make a killing at our expense as much of this increase will inevitably filter down into ticket prices.

This is scandalous in every way.  Firstly, there is the little matter of moral hazard - that individuals and businesses  should take the rap for their own miscalculations.  Secondly, there is the cost to the public; multiply this around the economy and it soon adds up.  Thirdly, there’s what it tells us about running a business in Britain today; don’t bother with research and development or making widgets or whatever - the really juicy returns are to successful lobbying and getting the rules rewritten to order.

Labour may talk the language of commerce but they really don’t understand it.