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Posted by manicbeancounter on March 29, 2014
EurActiv website interviewed Ed Davey, Secretary of State for Energy and Climate Change. They reported Davey as saying:-
“My recommendation to most politicians who want to talk about the climate is to listen to the scientists and listen to the evidence,” he said. “Of course you can question it, but when there is overwhelming evidence you should tend to shut it.”
Rather denounce critics Ed Davey needs to grasp the policy problem. Britain is the only country in the world committed to an aggressive carbon reduction policy. The sum of actual carbon reduction policies in place globally will do practically nothing to offset the growth in emissions from emerging economies. If, as Ed Davey believes, the science is correct about the catastrophic consequences resulting from all these emissions, then he is faced with a terrible truth. Britain will incur hundreds of billions of pounds of cost over the next few decades, yet leave future generations to bear 99% of the climate change problem when compared to having done nothing at all. Ed Davey is fronting policy that is net harmful to this country by any measure.
If Britain wants to truly lead the way on getting a global agreement on carbon emissions, it should show that it is possible to successfully transfer to a low carbon economy for costs of 1% of GDP (as Stern claimed), and with zero impact on long-term economic growth. Britain’s current policies are something any country would avoid like the plague, even if they had the same views on the “science” as Ed Davey. From the evidence to date in Britain and other countries, there are no policies of net benefit, even if the political issues can be sorted out. The fact that no other country has followed the UK’s lead in passing the Climate Change Act 2008 would suggest that see the harm that the policy is causing.
These comments were reported by The Daily Mail on 6th March and Bishop Hill on 8th March. I looked into this issue in the recent post “Why Climate Change Mitigation Policies Will Always Fail“.
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Posted by manicbeancounter on March 8, 2014
Labour’s Green Paper on Energy has been found by Alex Cull (comment at Dec 2, 2013 at 1:03 PM) at the site “Your Britain“, in the Agenda 2015 section. Having read it, I can see why the Labour Party are not keen for the electorate to find the document. Some quick observations, that I believe are sufficient to show that Labour have not bottomed out the only, let alone the best, explanation of why retail prices have risen so fast in last few years. What this clearly shows is that Labour’s proposed policy freeze is not just misplaced; it is positively harmful to Britain having future low-cost and secure energy supplies.
Note 03/12/13: This post will be added to over the coming days.
Update 04/12/13: Note on declining investment in “clean energy”
Billions not Millions
The Executive Summary states
Lack of competition in the retail market has resulted in consumers paying £3.6m more than they need to each year.
Caption to Table 1 on page 7 states
Lack of competition in the retail market has resulted in consumers paying £3.6 billion more than they need to
Error in Calculation
The source of the £3.6bn is from Which?
The consumer group Which? found that 75 per cent of customers are on the most expensive tariffs offered by suppliers – their standard tariff – and are not getting the cheapest deal in the market. They estimate that since 2011, families across the country have paid £3.6 billion a year more than they need to as a result. That means that households are on average paying £136 each year because the retail market is not working in the way that a competitive market should. If this market was genuinely competitive, energy companies would face stronger incentives to drive their costs down and pass savings to consumers through lower prices and cheaper tariffs; but this is not happening.
That implies that
- In a perfectly competitive market, the single price would be the very cheapest rate available.
- As a consequence the big six energy companies are pocketing the difference.
So, there is a monopoly profit of greater than £3.6bn. Ofgem monitors the big six energy firms. The BBC reported on 25th November that
Overall, profits in generation and supply across the half-dozen firms fell from £3.9bn in 2011 to £3.7bn in 2012.
So the competitive market profit fell from £0.3bn to £0.1bn? I don’t think so. The price differential is due to competition working, not due to its’ failure. Like in many areas, if you shop around you can get a better deal than those who do not, as sellers will discount to win your business. If you do not shop around, you will get a bad deal. Look at insurance, hotel rooms, flights or even consumer goods. Reducing competition will cause profits will rise, and the savvy consumer will lose out. Regulate enough and even those who never haggle will not get a good deal.
Decline in those switching suppliers
…. a confusing system of 900 tariffs makes it hard for consumers to actively engage in this market. Since 2008, the number of people switching energy supplier has fallen by over 50 per cent, and switching levels are now at the lowest level on record. Low levels of switching means that the big energy companies have a ‘captured market’ which reduces the incentives to keep prices competitive.
Fig 1 shows a decline in number of people transferring between suppliers between year to year. This shows a decline from around … to …. Is this evidence of a decline?
All other things being equal, then it is evidence of declining competitiveness. But all other things are not equal. A supplier can take action to retain the business. There is passive action and non-passive action.
Passive action is when the customer tries to move away, or threatens to. They are can offered a better deal to retain the business.
Proactive action is to offer the customer a better deal. For instance, I moved supplier in 2012 on a 12 month contract. In July, just before the end of the deal, the supplier offered me their best deal. This I accepted, after a quick check.
A decline in transfers could therefore be due to suppliers taking action to retain custom. This saves on their costs, and consumer’s inconvenience, whilst keeping the market competitive. As the cost to energy companies is less, this can keep overall costs down.
A test of this is to look at the differential between the standard tariff and the competitive tariffs over time for each supplier. If that has widened over time in line with the decrease in those switching then the Labour Party are correct. If it has widened, I would be surprised given the increasing number and sophistication of the price comparison websites. It would be a failure both of government policy over many years and the market to respond to those incentives.
Differential between wholesale and retail prices
Figure 2 on page 11 is meant illustrate for the electricity and gas markets how the wholesale prices have stayed roughly the same, but the retail prices have widened. The graphic for the electricity market is shown below.
The explanation is as follows.
Wholesale energy prices have been relatively stable since the winter of 2011, rising by an average of 1 per cent a year. However, the large energy companies have increased energy prices by an average of 10.4 per cent a year over this period (Figure 3). This has led to a growing gap between wholesale and retail prices that cannot be explained by the growth in network costs or policy costs which account for 20 per cent and nine per cent of the bill respectively.
So the explanation is derived from the following logic
- Prices have risen by over 30% in the last 3 years.
- Wholesale prices form the biggest part of the cost to the consumer and have not moved very much.
- Other costs have grown, but now only account for 29% of the bill.
- By implication, the profits of the energy companies have increased at the expense of the consumer.
Let us first assume that the scales are comparable. The left hand scale is the wholesale cost in £/MWh. The right hand scale in the average annual retail cost per household. In 2010 the average household was paying about £430 for their electricity, compared with £550 in Jan-2013. The wholesale price component rose from around £280 to £310. So “other costs” rose by around £90. This is a huge increase in costs. With around 26 million households, this is around £2.4bn – well on the way to accounting for the £3.6bn claimed above. There is gas as well remember, so there could be an argument.
But what are the other costs?
- Standing charges. The costs of operating the National Grid, and replacing meters in homes, along with subsidies for the poor.
- Renewables Obligations (RO) and Feed-in-tariffs (FIT). That is the subsidies that the owners of wind turbines and solar panels get over and above the wholesale price of electricity. For instance, operators of offshore wind turbines will get a similar amount in RO as from the market price.
- The small, but growing STOR scheme.
- The fixed costs of the retail operation. That is the staff to produce the bills, operate the call centres, along with the cost of a sales force to get you to switch.
- The net is the retail margin.
Let us assume that “network costs or policy costs” and policy costs doubled in three years as a proportion of the total electricity bill. That is from 14.5% to 29%. That would be £97 of the £90 increase in margin. This hypothetical example needs to be tested with actual data. However, the lack of the rise in profits is corroborated by OFGEM figures for the Big 6 Energy Companies, as I summarized out last week.
The margins on “supply” have not increased, and are still at the level of a discount supermarket. The margins on “generation” derive from selling at wholesale and the proceeds of the subsidies. Unless Labour are implying that the “Big 6″ are guilty of false reporting to OFGEM, the vast majority of the increase in differential between wholesale cost and selling price is accounted for by factors other than profits to the energy companies. Labour are implying the vast majority of the increase in differential between wholesale cost and selling price is accounted for by the profits to the energy companies, and therefore misleading the electorate.
Interpretation of clean energy investment figures
Figure 4 is the following chart
The fall in investment, at a time when it should be accelerating, is a result of the policy environment and protracted decision-making by Government. The Government has been widely blamed for failing to provide the policy certainty needed to de-risk investment.
There is an alternative way to interpret this data. Labour lost the general election in May 2010. What might be more significant is the passage of the Climate Change Act 2008. In the next year investment was nearly 3 times higher, then falling each year since. The Climate Change Act 2008 greatly enhanced the incentives for “clean energy” investment, hence the leap. There are only a finite number of opportunities, so the investment is reducing year-on-year. This being despite the biggest source of revenue coming from index-linked subsidies loaded onto electricity bills. Another reason is that many in the industry saw problems with the technology, that are only now coming to light. In particular the lifespan of the turbines might be shorter than previously thought. Further, the opposition to the wind turbines (where most of the investment is concentrated) is increasing, such as against the proposed Atlantic Array that would have blighted the Bristol Channel. Campaigners are also increasingly concerned about noise pollution.
Therefore, I propose that declining investment is not due to Government spin doctors failing to sweet-talk big business, but due to the reality of “clean energy” turning out to fall far short of the sales patter.
NB First time comments are moderated. The comments can be used as a point of contact.
Posted by manicbeancounter on December 3, 2013
We have heard a lot recently about how rising electricity and gas prices are a result of the large profits of the energy companies. Ed Milliband went on the attack at the Labour Party Conference, proposing a price freeze if Labour gets into power. With energy prices going up 10% a year I wandered how large these profits must be. The BBC today gives some clues.
Regulator Ofgem says the big six energy suppliers saw profit margins in the supply of gas and electricity rise to 4.3% in 2012, up from 2.8% in 2011.
And the watchdog says supplier profit per household customer rose to £53 last year, from £30 a year earlier.
However, the power generation profit margins at the firms fell from 24% in 2011 to 20% in 2012.
Overall, profits in generation and supply across the half-dozen firms fell from £3.9bn in 2011 to £3.7bn in 2012.
So the retail profits have increased, but the overall profits have decreased. This is despite turnover having increased due a large hike in prices. It is a incorrect to say that the double-digit price increases paid for larger profits of the big six energy suppliers. The following tries to explain why.
Ofgem has not uploaded this latest data to its website, so I have to piece together from what is available. Factsheet 118 details the comparison of 2011 with 2010. It says
• the average profit margin across all six suppliers for
supplying gas and electricity to homes and businesses
declined from 3.8 per cent in 2010 to 3.1 per cent in
• the margins in generation, however, increased from
18.4 per cent in 2010 to 24.4 per cent in 2011. This is
because of higher wholesale electricity prices. Typical
generation margins also tend to be higher than in supply
to finance the capital investment needed to build power
A summary of these figures is below
In other words, there is mostly an about face from the very profitable 2011, but still much higher profits than in 2010.
Given that the profits from power generation are much higher, we need to look at this more closely. What should be recognized is the relevant rate of return generation is not ROS (Return on Sales), but ROCE (Return on Capital Employed). An indicator of this can be gleaned from Ofgem’s summaries of the major’s accounts for 2011.
For example, Scottish power has two power sectors. In 2011 it had an EBIT of 168.5 on sales of 1677.0 on “generation” and EBIT of 91.0 on sales of 172.0 on “renewables”. So the older generation has a ROS of just 10%, and the newer, cleaner, renewables a ROS of 53%. To some extent this is not surprising. Renewables – mostly wind turbines – require a huge upfront capital investment, but low operating costs. Also, the renewables capital stock is much newer. But an additional figure is also revealing – the terra-watt hours sold. The “generation” produces £82.60m/TWh, whilst “renewables” produces £101.20m/TWh.
The only other producer to give a split of energy generation is EDF energy, only this time between nuclear and non-nuclear. For nuclear power, the ROS is 40% and £48m/TWh, and for non-nuclear power, the ROS is 10% and £47m/TWh. With Hinckley C, the guaranteed index-linked rate is a minimum £92.50m/TWh.
- The large profits are in power generation.
- The profits in terms of ROS will increase with new investments, even if ROCE stays the same.
- The profits in terms of ROS will additionally increase with the investment in renewables and nuclear, even if ROCE stays the same as initial outlay per unit of electricity is much higher, and the operating costs are tiny, when compared with a coal or gas-fired power stations.
- Higher capital investment will mean above-inflation rises in headline profits and ROS, even if the proper measure of profit for generation – ROCE – stays the same.
- The responsibility for the Climate Change Act 2008, that generates the higher ROS figures (and much more expensive electricity) is primarily due to the last Labour Government. It was steered through by the then Environment Secretary Ed Miliband. To freeze retail prices will reduce the ROCE of the energy companies, giving a clear signal not to invest in the power generating capacity to stop the lights going out. If you want lower prices and profits, then have a truly liberalized market with fossil fuels given equal status.
Posted by manicbeancounter on November 26, 2013
A few years ago here in Britain we were told have every year the flowers were blooming earlier and earlier because of global warming. One of the most beautiful natural woodland signs of spring is a carpet of bluebells in April time. Well this morning I took a walk in Workington in the far north of England and the bluebells were in full bloom. Mixed with the smell of wild garlic it was a wonderful experience. Here in Manchester, the bluebells in my garden – in the most informal, organic and highly naturalistic sense of the term – are still in bloom about a month later than normal. By now I have had to lop the dead heads and pull up the long leaves before they rot, becoming food for the slugs that plague the garden. The rhododendron is blooming at least a week late. They normally are in bloom for two weeks in late May. By 1st June, the flowers are past their best. I also include a picture of the lilac tree, obtained with the house and occasionally pruned in a most irregular fashion.
The rhododendron was purchased from Bodnant Garden in North Wales over 20 years ago. Despite my near total inattention, it seems to grow a little each year. This coincided with the period when I ceased being a volunteer rhodie-basher with the National Trust. In many parts of Britain the common purple-flowering ponticum has spread through many areas with peat soils, becoming an invasive species. The bushes grow to over ten metres high, and completely cover the ground, to the exclusion of other plants, including re-generating trees in woodland areas. The waxy evergreen leaves are also acidic, so once cleared the soil can be poisoned for years after. I describe myself as a “slightly” manic beancounter. There was nothing slight about the manic ferocity that I used to hack the invaders down with a bow saw, smash and tear up the roots with a mattock and then consign the whole lot with to a flaming pyre.
The bluebell seeds were given to me by the late Joyce and Jack Page, a keen pair of organic gardeners. I was warned that they could spread, so ignored their advice and scattered them in various patches in the both front and back. Now, every other year I dig out all the bulbs I can find, but they keep re-sprouting.
Posted by manicbeancounter on June 1, 2013
At Jo Nova’s unthreaded there is a debate going on about Australian car industry. Started up in the post war era, it is currently going through a crisis. In fact, despite large subsidies, it is collapsing. The major messages I want to get across are:-
- Learn from other countries. Britain in the 1970s for instance.
- When in a hole, stop digging. If the car industry is failing, throwing money at it might win a few votes, but damage the economy.
- Australians have the energy, and entrepreneurial skills, in abundance to create new wealth-generating opportunities.
- Australians (like other countries) are being crippled by the short-sighted hand of Government, who should recognize that do not have the skills, nor the incentives required to create an industrial policy that is of net benefit to the country as a whole.
On making a new start and learning the lessons of Brazil
To successfully start a new car company is virtually impossible in the modern world. In recent decades the successful ones have been in China, but with the help of, and by copying, established marques. Outside of China, there was Proton of Malaysia. There original car was a 1984 Mitsubishi Lancer. That end of the market you do not want to get into – high subsidies and reliant on cheap labour. The last major car company start-up was (I believe) Honda.
Then there are niche markets. McLaren is doing well in the UK, but a midget and building on its F1 base. As the majority of F1 cars are made around Silverstone, it had an advantage of a skilled labour pool and (most importantly) the engineering and design skills.
The alternative is to do what Brazil did. For years it did not allow any imports. There were four foreign car companies building in Brazil (Fiat, Ford, GM and VW). The quality was shocking, models were decades older than Europe and the the companies colluded. VW built a variant of the Ford Escort and the Beetle came off Ford production lines. In 1994, they opened up to imports, but with a 25% import tax. Very quickly 70-80% of the market was imports. So the Brazilians stuck a 70% tax. The response over a decade was for more foreign companies to open assembly plants. Then came Mercosur – the “free-trade” zone covering most of South America. Now there are plants from Renault, Mercedes (mostly the A-class), Audi and Volvo amongst others.
The major problem of taking this route is the restriction of choice. The Mercosur market (including Brazil, Argentina and Mexico) is a number of times bigger than Australia, and last time I looked, had a more limited choice and higher prices than in Europe.
Learn for Australia what the biggest businesses did in the 1980s. Stick to what you are good at. Let the market develop in Australia based on its comparative advantages. That is farming (which you have developed from low margin sheep farming to high margin wine production) and mining. Then there is tourism as well, so long as you don’t let your government tax air travel.
In the longer term there are spin-off industries. In Britain we don’t have much manufacturing, but we have some of the world’s best designers. Oil production is declining, but a disproportionate amount of global off-shore technological expertise is around Aberdeen.
The mistake of most people to associate wealth with making actual things. It is not. Wealth is about creating greater value than the inputs. Assembling everyday, easily reproducible, objects adds very little value, so is confined to the poorest countries. For instance textiles in Bangladesh, or assembly of commodity items in China. The real wealth comes from new ideas, or taking existing processes and doing them more efficiently and/or effectively than anyone else. That is staying ahead of the game.
A readable primer on the economics is Israel Kirzner’s “Competition and Entrepreneurship.”
When in a hole, stop digging. Lessons of the British Experience
Andrew McRae is torn between ending the subsidies and letting the car industry fold.
I can see why you are torn between Government Industrial policy and letting free markets work. I finished high school and went to university during the early Thatcher years and saw both sides. In the 1970s one of the most famous British cars was the MG Midget – a tiny two seater sports car. There were huge protests when production was stopped, with each car costing twice the selling price. Like most of the cars produced in Britain it was unreliable, particularly when compared with the Japanese competition. The country subsidised many industries, spending 5-8% GDP on subsidies. We tried to get into the computers – and failed. The one bright spot was Concord, developed with the French. A phenomenal technological achievement, it cost £4bn (A$40bn+ in todays money) and the few made were virtually given away. It was a case study in how an original government project at low cost with high rewards switches to the opposite. When mooted in the mid-50s, it was to cost £80m with a market for hundreds of planes.
One thing that you must not lose sight of is the existing workers in your car industry. In Britain in the 1970s there were millions employed in manufacturing, whether the car industry, steel, shipbuilding, engineering, or technology assembly lines. Another 250,000 jobs were in coal mining. Many who were made redundant in their 50s never got jobs again. Many others only obtained lower paid unskilled work. There is still incredible bitterness towards the whole Thatcher legacy. But the fault lay not with ending “industrial policy”, with its ever-growing subsidies, but in starting it in the first place. It is the same principle as for the carbon tax. Even assuming the theoretical case was true, the people least qualified to implement the policy are the politicians. Not because they cannot hire the best experts to devise a policy. It is for business and a carbon tax to work you need to make changes, which will hurt people. In manufacturing you need to continually cut jobs and change. With an “optimal” policy to reduce CO2 emissions some jobs need to be destroyed (to get huge benefits) and people suffer hardship. Politicians who are so openly ruthless get voted out pretty quickly, even though they are doing the best for the country. The best long-term interests of the country are the biggest vote losers, if those politicians are advised think short-term and are advised by spin doctors. Yet the interests of a modern developed country are in providing the structures to enable the future wealth-creating opportunities to develop. Australia is probably the pre-eminent example of a country for this to happen, as there are many people with vision, ability and the passion to make things happen, along with the ability to take risks. The crippling disability that they need to overcome is the risk-averse dead-hand of government who cannot see beyond the next set of opinion polls.
Posted by manicbeancounter on May 27, 2013
You are quite right on two issues here, which I believe have been called the ratchet effect and the debt servicing impact.
The first is that it is easy to increase government expenditure, but much more difficult to scale it back as there are entrenched interests to stop the scale back. It is easy to give people welfare benefits or create jobs. But try to take these away and people will fight like crazy to keep them.
The second on debt servicing you demonstrate very well. As total debt goes up, so does the interest on that debt.
There are other issues that should be taken into consideration on the deficit and debt problem.
The first issue is the size of government. When an economy enters recession, the tax receipts fall and expenditure rises. Corporation tax is the first area to go down, followed by income tax as unemployment rises. In expenditure terms, welfare payments will rise along with (possibly) business bail outs. With small government, taxing little and spending little, this impact was small. With large government – in Britain rising nearly 50% of GDP – this effect is large. A 6% decline in GDP perhaps increased the deficit by 6-7% of GDP. Under the Eisenhower administration, a similar decline would worsen government finances by maybe 2% of GDP. Big government exacerbates the size of cyclical swings.
The second issue is the position at the start of downturn. In mid-2008 both USA and Britain had structural deficits – in the USA to finance the wars in Iraq and Afghanistan, in Britain finance a huge increase in public sector pay and capital spending on schools and hospitals. A structural deficit is the measure of the average government deficit over the course of the business cycle. In Britain at the top of the cycle, the actual deficit was around 3% of GDP, with a planned rise to 4%. The structural deficit was probably greater than 4% of GDP in mid-2008 in Britain and maybe slightly smaller in the USA. Below is my estimate of the impact of Britain’s structural deficit in April 2010. I estimated that the structural deficit built up between 2001 and 2008 would in the long-term increase National Debt by 40% of GDP. I was overly optimistic in my assessment.
The third issue is with the classical Keynesian Multiplier. Crude textbook Keynesianism of the 1960s for a closed economy stated
E = C+I+G
Or national expenditure is the sum of Consumption, Investment and Government expenditure.
The theoretical impact of increasing government expenditure on total output, when the economy is at less than full employment, is Y/G. If government expenditure is 10% of national income, then increase G by $1 and Y will increase by $10. If government expenditure is 40% of national income, then increase G by $1 and Y will increase by $2.50. However, crudely put, if the government expenditure does not take up the slack in the economy (the deficit in aggregate demand), then (in an inflation-free economy) the government expenditure “crowds out” private expenditure. Another way of putting the situation, if the economy is not “stuck in a rut” as Keynes assumed in his “General Theory”, but merely reacting to overinvestment (such as a housing bubble), then increased government expenditure will have no effect on total output, but “crowd out” other expenditure. It will also add to the nominal national debt, without adding to total national income, thereby increasing national debt as a percentage of national income, or expanding national income leading to increased tax revenues and thus closing the deficit.
The fourth issue is fiscal tipping points. If the increased government expenditure fails to stimulate the economy, then the result will be a larger structural deficit. If, like some European countries, there is a further contraction then the deficit will increase. In Greece, Spain, Italy and Portugal, this further downturn has led to increased economic risk, pushing up interest rates. This increases short-term debt costs, further increasing the deficit. The only way to stem total collapse is to massively cut public expenditure and increase taxes to not only pay for the debt-financing costs but to rapidly cut the deficit as well. In climate change there has been much spurious talk about possible tipping points in the remote future if certain things come true. But in OECD economies, with some already having gone beyond the fiscal tipping points, many (including Krugman) seem oblivious to the possibility. Should we not use a smidgeon of the precautionary principle in economics , proclaiming austerity as an insurance against severe depression.?
Posted by manicbeancounter on May 7, 2013
This looks a very interesting project that mirrors my own thoughts. Take the UNIPCC “projections” of a future catastrophe – including all the nonsense about falling crop yields in Africa, collapsing polar ice caps, etc. – and you still have not got anything like the justification for policy.
If you then add the additional costs of ineffectual implementation, poor policy-making and other “policy” that economists would not recommend (e.g. bio-fuels) then the 50 to 1 ratio balloons. If the “science” turns out to be too extreme. If for instance a doubling of CO2 leads to just 1.5 degrees of temperature rise instead of 3 degrees, then the catastrophic consequences will not just halve, but be many times smaller. If the catastrophic consequences of a given amount of warming have been overstated, (such as storms not becoming more extreme, but less – as Hansen and Lindzen now agree) then it becomes worse still. If it turns out that a small amount of warming of net benefit to the planet (as it will be in Northern Europe) and/or that higher CO2 levels are of net benefit to the planet, then the whole exercise turns from incurring costs to prevent the future consequences of another lot of costs to incurring costs to prevent a benefit from happening.
Originally posted on Watts Up With That?:
This will be a top post for a day or two, new posts appear below. For those waiting…PAYPAL is now available
I’m participating in this, as are some other well known climate skeptics. The producer (Australia’s video pundit Topher Field) has 4 weeks (28 days) to get it funded in IndieGoGo. I ask your help to make it happen. Note, I have no financial interest in this film, I’m merely one of the people to be interviewed. Thanks – Anthony
View original 1,106 more words
Posted by manicbeancounter on May 3, 2013
Although in Australia the current economic situation may seem bad, it is nothing like as dire are Europe.
There is a new issue. After a long period of surpluses in 2009 the government created significant deficits. These do not seem justified by the small slowdown in economic growth. Any ideas?
Using World Bank Data, many of the Eurozone countries have been running large, structural deficits for years. Australia only went into deficit in 2009.
As a result, Australia’s national debt is small relative to GDP compared with the European nations.
The relative problem can be seen from the growth rates. Australia has yet to go into a full year of recession. That is growth of less than zero.
Neither has growth dipped much below the average for 1998 to 2007.
Posted by manicbeancounter on December 31, 2012
Although I am not in any way a socialist, I vigorously oppose anything where the poor and weak are made to subsidise the rich and the powerful. I also strongly oppose policy being enacted which will be to the net detriment of society as a whole. This is why I strongly oppose the latest report from Alcohol Concern “Binge – Drinking to get drunk: Influences on young adult drinking behaviours“. Before anybody gets the wrong idea, I support their concern about binge drinking, especially amongst minors. I also believe that if there were ways to improve this situation, then they should be enacted. However, if economic price incentives are involved, then one should also look at the unintended consequences.
The policy proposed is again a minimum price for alcohol. This has long been touted by the last Labour Government, the BMA and David Cameron. Yet none really understand the harm that it will cause to society. The proposal it to impose a minimum retail price per unit of alcohol of about 40p to 50p. This will not affect the cost in the pubs and clubs, where the cheapest pint of standard lager is around twice this level. It will dramatically impact the retail prices, in both small off-licences and the supermarkets. Below are some examples.
The way prices work is that premium products have not just premium prices, but larger profit margins both in absolute and in percentage terms. A minimum price for alcohol will invert this position. Suddenly a 3 litre bottle of cheap cider will have the highest profit margins not just in absolute, but also in percentage terms. This will create very perverse incentives for the retailer. One direct consequence will cause a rise in the price of drinks already over the minimum price. Consider the situation of the cheapest wine at £2.99 per bottle and the more mainstream wine at £4.99.
Even at 50p a unit, the cheap wine is still cheaper than the mainstream one. If the mainstream wine price remained unchanged, then the price premium to the consumer has dropped by 75%. Better quality has less of a premium. The retailer gets the margins reversed. The margin on the premium product goes from being 86% more to 48% less than the cheaper product. It makes sense for the retailer to increase the price. This increase might not be proportional to the cheap wine, but a least to make a greater margin in value terms.
Will the retailer end up making greater profit. This depends on something called elasticity of demand. To make less money on the cheap wine, demand would have to drop by over 72%. To make less money on the mainstream wine, demand would have to drop more than 53%.
Will this be of benefit to the supermarkets? It depends on the elasticity of demand. From Investopedia
Definition of ‘Price Elasticity Of Demand’
A measure of the responsiveness of the quantity demanded of a good to a change in its price. It is calculated as:
For the cheap wine the elasticity for break-even 72%/50.5% = 1.43
For the mainstream wine the elasticity for break-even 53%/25% = 2.12
Alcohol is well-known for being highly inelastic with respect to demand. That is elasticity measure is much less than 0.5. The supermarkets and the off-licences will make much, much larger profits on sales of cheap booze. With an elasticity of less than 1, consumers will end up spending more on alcohol than before, even though they are buying a smaller quantity. The biggest proportionate impact will be on those least able to afford that price rise. This is a double-hit. The poor spend a larger proportion of their income on alcohol than those on a higher income. They are also more likely to buy the cheaper forms of booze, which will have the larger percentage price rise.
The more equitable solution is to restructure the excise duties. The tax on alcohol should be shifted not just onto a per unit basis, but in such a way that it specifically targets the low-cost booze which is most attractive to minors. Therefore strong ciders (which I like), alchopops, and strong lagers should all have premium rates that are higher than, say, standard strength beers and wine. Weak taste drinks (Vodka, white cider) should have a premium over strong taste drinks such as real ale, whisky, or full-flavoured cider. This bigger added bonus is that there would a net gain in excise taxes, rather than just a gain in VAT receipts.
Posted by manicbeancounter on November 20, 2012