ASI on the Minimum Price for Alcohol

Uncharacteristically, the Adam Smith Institute has made a serious error in its economic analysis. The idea of alcohol being a Giffen good is certainly a contestable one. There are a couple of pertinent areas here. The first is whether alcohol in the UK meets the requirements of a Giffen good. The second is whether the pattern of discounting is such that installing a minimum price will create the Giffen good conditions.

The Conditions for a Giffen Good. (Descriptions here and here)

  1. A staple on which people spend a significant part of their income.
  2. Applies to the very poor.
  3. There are no close substitutes

The current state of play in the UK market.

1. The major supermarkets concentrate their promotions on premium brands. Most of the promotions for cider & beer are for premium brands. The wine promotions similarly are mostly for the more expensive (& often branded) varieties. Own brand (especially the budget brands) are less frequently and less deeply discounted.

2. Many promotions do not involve a gross loss for the supermarket. By allocating space for high volume promotions a small gross margin can generate a larger net profit than the full price low turn product. It is all about overhead absorption.

3. Promotions made more profitable by promotional & volume discounts from the suppliers.  As I regularly shop at more than one major supermarket I notice similar promotions across different supermarkets.

4. Many promotions are partly spurious. For instance I recently noticed a bottle of standard Cava at half price. The full price would significantly more the vintage variety. Or compare the undiscounted price per litre for large packs of beer with the smaller pack sizes. You will find the “undiscounted” price is often more expensive, indicating the discount is exaggerated.

5. Many people pay the top prices at clubs and pubs in city centres. Cheaper prices are obtained at local pubs (known as bars in the USA & on mainland Europe). Much cheaper still is the supermarket. So for English bitter beer, you pay £5 per pint (568ml) in a club in town centres, £3.50 in a local pub, £2 equivalent for a 500ml bottle, £1.40 for a 4 pack cans and £0.99 for the best offers of 3 x 8 440ml can packs. Therefore, there are many close substitutes without change of brand, though the quality and ambience may not be the same! Higher prices lead to the next best substitute, which is why many choose to drink at home, or on the street, rather than in the more sociable public houses.

6. The UK is a rich country. In spending power (purchasing power parity) is at least 35 times richer than in 1750 (or modern day Ethiopia). In nominal terms at least 200 times richer. Someone on the minimum wage with the proverbial wife and two kids, will have in excess of £1200 per month disposable income. If an alcoholic drinking the cheapest booze – 3 litres of 6% cider (at £1 per litre) a day, they would spend just 10% of their income on booze. At 70p per unit minimum (10ml of pure alcohol) they would see this rise to a third of income. This is the most extreme case. In practice, most problem drinkers consume less and do not get the cheapest alcohol from the cheapest source. There are opportunities for substituting to cheaper forms of alcohol and reducing other forms of consumption.

In its flawed analysis the ASI actually understates the case against the minimum price of alcohol. Any proposed level of pricing would simply be ineffective in reducing alcohol consumption.  It will merely serve to hasten the decline in pubs and drive people down market. Most of the discounting in supermarkets is aimed at getting consumers to move up market, where the larger profits reside. The only effective levels of seriously reducing alcohol consumption would be far above the bounds of political acceptability.

Risk, Volcanic Ash, Regulation and the Leaders debate 2

John Redwood today makes some brilliant observations on “Bash the banks and Praise the Regulators”. His comparison with the ash cloud and the banking regulation is particularly apt. But it is not just the cost of inappropriate regulation that there is a similarity. The leaders’ debate of tonight showed crystallised the issue for me. It is how do the authorities deal with an unprecedented situation? The risk-averse say let us do nothing until there is full information. On the financial system, nothing was done to control the excesses. On the ash cloud everything was stopped until the scope of the problem could be assessed by the experts.

There is a way of going into the unknown without full information. You set general rules and assess the magnitude of any problem.

-         On the ash cloud, you compare the risk with the size of the eruption, the size of the particles and the distance from the volcano. From this, you would have found no evidence of large jet aircraft getting into emergency situations 1,000 miles from an eruption, in an ash cloud that is hardly visible.

-         From the financial system, the situation was evident that house prices and consumer borrowing was going to unsustainable levels on an unprecedented scale from 2003 onwards. The 0% interest credit cards and the large discounts for changing mortgages were evidence of this in the UK. The sub-prime boom, with mortgages deals agreed whereby in 3 years the borrowers could not meet their repayments was evidence of this in the USA. It was the very magnitude of the problem that should have merited special attention. The action should have been to raise interest rates and increase cash requirements for banks.

On the surface the action was the opposite – One to stop what was already happening, the other that immediately stopped anything from happening. But the cause is the same – by requiring detailed rules and acting on how others will perceive our actions, the authorities took wrong course of action.

 The Leader’s debate crystallised it for me. There was one leader who stood out. His reaction to any problem is not to take any risks.

-         He will not risk safety by letting planes fly.

-         He will not start cuts now to risk the recovery.

-         He will not risk banks ever getting into trouble again.

-         He will not risk a foreigner being unidentified.

-         He will not risk existing jobs.

-         He will not risk offending our European neighbours by disagreeing with them.

-         He will not risk independent MPs, by banning them from second jobs and monitoring every penny they spend.

-         He will not risk independent thought, by stipulating what religions should believe.

-         He will not risk diversity in education by allowing independent schools to be formed in the state sector.

 In so doing, after another 5 years of his leadership we will have no recovery; we will have no decision-makers in government – just be taking orders from Brussels and the IMF; we will have no risk-takers in business as most will not want to overcome the ever-higher regulatory hurdles for achievements that are taxed away and vilified.

We will also have no future.

Financial Regulators are as fallible as the rest of us

John Redwood, in defence of the banker’s, asked whether the regulator’s in the part four years has engaged in socially useless activity.

Unusually, I came to the defence of the regulator.

Regulators, even if nominally independent, work within the current political & economic climate. They would not have called for increasing capital requirements during the boom, as there was no visible reason to do so. After all, we had “ended boom & bust” – due to the prudent handling of our economy by the then Chancellor. Where was the risk factor that justified such a measure?

 If a Regulator had called for tougher rules, he would have been lambasted by the press, and criticized by most expert economists. Financial Experts would say capital requirements could be lower, as risk was now diversified throughout the global financial system.  Politicians would have said that such unilateral action would jeopardize London’s position as the World’s No.1 financial centre. If the Regulator had sufficient stature, then the £ would have gotten a bit jittery, and some shares in the banking sector would have taken a tumble. A government spin doctor would have come out we a speech saying “what I think you will find the Regulator actually said was .…” – and then say something that was the opposite, or renders the comments meaningless.

After a few days of ducking the issue, the Chancellor would have given his full support, followed the next day with the Regulator’s “voluntary” early retirement (or movement sideways).

A similar picture was with the Central Banks. By cutting interest rates after the dot.com bubble burst and again after 9/11 we obtained an asset price bubble. The US or the UK were not going to call a halt by raising interest rates, as it would have been both politically unpopular and raised exchange rates. The normal market adjustment, with a mild recession was averted. The long-term consequence was system imbalances becoming so large that the eventual correction nearly wrecked the financial system.

 The lesson to be learnt is not tougher and/or more detailed regulation. It should be a humility concerning our powers to intervene, as they can have consequences that we cannot foresee. Furthermore, markets have rushes of exuberance that will, sooner or later, be corrected. Avert the market correction and you build up trouble for the future.  Interventionism does not cure the problem of imbalances, merely delays it.

MARKETS WILL ADJUST. BEFORE OVERRIDING TO COUNTER FLUCTUATIONS,  YOU SHOULD FIRST BECOME OMINISCIENT.

Alan Greenspan convinced everyone that he had achieved this status, but turned out, in the long run, to be wrong.

The biggest current imbalance is in the housing market. The slide has been halted by near zero interest rates, but will resume when those rates get back towards normality. Why do I say this when average house prices are around the long-term average of four times average earnings? Because interest rates are well below their long-term average for existing borrowers. When they revert to around 5% that new borrowers are paying, and when unemployment peaks at 3 million plus (with some coming from the state sector), then the supply of houses will exceed demand.

Climate Change Camp – for good or evil?

The Tax Payers alliance have a posting on the Climate Change Camp set up in Blackheath.

 

Here is my comment:-

 

The comment you make is a fair one. Before proscribing a painful and potentially harmful course of treatment, an ethical doctor would

-         check the diagnosis is accurate – both in type and to the extent.

-         Make sure that the treatment is likely to improve the condition of the patient.

In a similar vein

-         The assessment of the extent of the climate change is not helped by failing to examine validity of the data or statistical analysis.

-         Nor by ignoring contrary science.

-         Nor by ascribing every bit of extreme weather to anthropogenic factors.

-         Nor by ignoring the benefits of warming (e.g. less old people dying in the winter cold)

-         Nor by assuming that a global policy is both the best available and that it will improve the situation.

-         Nor by ignoring the harmful effects of oppressive taxes and regulation. You could reduce economic output and bankrupt the government. This could lead to the collapse of public services (with many dying as a consequence) and millions permanently unemployed. In the emerging nations, reduced output will lead to the mass hunger from which many have just escaped. It will also lead to an increase in wars.

 

To establish that climate change is the “biggest threat the world has known” needs substantiation. In the last century the cause of every major famine was either caused authoritarian government policies or by war. On the other hand, global growth ensured that, for the first time in human history, the vast majority of the worlds population can live free from hunger as a normal state of affairs, and each generation can look forward to better livings standards than their parents. For those who believe in peace and helping the poor should make sure that these achievements are not reversed.

Think! child seat advert lacks thought

The latest of the Government’s information video on child car seats lacks thought.

A mother straps her child into the car, whilst quoting a statistic that “300 children are killed or seriously injured in cars every year”. This is trying to impute that by obeying the law you are avoiding putting your child at risk of death or serious injury. The advert is misleading and should be withdrawn.

What the current law does not recognise is the following.

1. The differance between obeying the law and not will make very little difference to the probability of your child be seriously injured. The probabilty is insignificantly different from zero.

2. The probabilty of a child joining the 300 is more significantly changed by the way the vehicle is driven than how securely the passengers are belted in. Drive like a lunatic, or fail to concentrate on the road ahead, or drive under the influence of drugs and alcohol will all increase the probablity of an accident. Drive at moderate speed for the road condition, keep a safe distance and an awareness of other road users abd the probability of an accident is near zero.

3. It discriminates against smaller children. The height limit for using a booster seat is 135cm. The taller children attain this at their 8th birthday, whilst shorter children can only reach this height when then are leaving primary school. Shorties can be incredably sensitive about this issue.

4. It attempts to limit a very low probability horrific event, by causes a very high probability of discomfort for the child. One of my children would usually fall asleep on a journey of more than twenty minutes after a day out. They would slump against the seatbelt, and then awaken with a severe pain in the neck. Being on a booster seat would exacerbate this. I would claim that my boring (smooth and gentle) style of driving is what sent them to sleep.

It is a case of a law causing a net loss to society. If such exaggerated and unfounded claims were made for vitamins or medicines, the claimant would be rightly prosecuted. Infomertials should, at least morally, be bound by the same rules.

Regulation that only harms the honest

Burning out money has a post on the hurdles to open a new savings account. Introduced to help prevent money laundering, it

“there is not a single case of any would-be launderer being caught by this system. As you’d kinda guess, real launderers are quite capable of cobbling together the necessary fake docs, and ticking all the right boxes.”

Like with government expenditure, in regulation, the areas be scrapped are those where government activity does net harm to society. This anti-laundering legislation looks to be one of them.

The Adjunct to Cutting Government Expenditure

I have already posted about the need to cut government expenditure is a more rounded way through focusing on 7 major areas. There is an important adjunct to this. The ability of the economy to climb out of the recession will be hampered by

 1)      High Taxation

2)      Onerous Regulation

 The burden of these twin factors was able to be borne in the boom. They may have reduced profitability, but other factors such as low interest rates and the ever-increasing public expenditure more than offset these factors. In addition, the house-price bubble was helped by the planning constraints on new-build. This shortage of supply increased the house price inflation. Coupled with easy money and low interest rates it also helped the consumer boom.

The opposite will apply in the recovery. This is through,

 1)      The high costs of the regulation will limit the ability of firms to lower prices, whilst still remaining profitable – break even is higher.

2)      More importantly, the time taken in meeting regulatory requirements, whether in house building or in putting in place new investments, means that the payback period is lengthened.

3)      Regulations to protect workers rights means that taking on new employees is similarly discouraged (Protecting the employed in the good times means protecting the unemployed from gaining employment after the bad times – see much of Western Europe during the 1990s).

 Sustained recovery with real jobs will therefore be impaired.

 

Reducing the deficit requires not only cuts in government expenditure. It means removing the impairments of the private sector to adapt and grow.

 

John Redwood seems to be grasping this point when he recognizes that the car scrappage scheme just offsets some of the high taxes on the car industry. Here is my comment posted earlier.

 

Mr Redwood,

 You make a very valid points here about trying to undo the harm of  high taxes on the car with a subsidy for new car purchases. However, I would take issue with you on the government having encouraged new housebuilding. You have said before that house buying was encouraged house buying in the past with low interest rates from 2000 to 2005 (only then to raise them too high). However, tough planning laws have meant that during the boom the numbers of new homes being built were at record lows, with much of the new build being in apartments and not the more desirable houses. This shortage of new build when demand was (artificially) strong, further exacerbated the house price inflation.

 However, you do point to a general principle for a quick, sustainable and affordable recovery – Undo the harm done by higher taxes and more regulation.

In the boom, these extra costs were largely absorbed. They have encouraged a steeper downturn and the increased costs will slow down and diminish the recovery.

 

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