The Spending Cuts (that aren’t spending cuts)

Just a quick reality check: The UK government has postured and made a loud noises about their so-called “spending cuts”, and, indeed, the opposition in the UK have also waxed lyrical about “savage cuts”.

Well, here, courtesy of the office for budget responsibility, are those “cuts”, and the projected “cuts”, in full:

Total Managed expenditure

2012-13: £701.9bn

2013-14: £717.8bn

2014-15: £730.5bn

2015-16: £744bn (OBR figures Autumn 2013)

The Help To Buy “Time Bomb”

The classic definition of madness is doing the same thing over and over and expecting a different result each time.

British Prime Minister David Cameron seems very chuffed that his new Help To Buy Scheme is seeing such a large number of applicants right away. But I wonder if this isn’t another financial ticking time-bomb that’s set to go off, in a similar (if not smaller) manner that the last housing-related bubble went off?

Why is there this obsession with making people “home-owners”, foresaking decent economics in the process, even when those decent economics can steer you clear of a financial meltdown?

Buy all means, build more homes if there’s a market for them. That might curb prices and make a mortgage more economically viable. But when the government uses the banking/lending system as another tool for social engineering, you get, well, you know, what happened last time.

Some interesting views on this in the Backbencher, which is always well-worth a read.

Andy Jones TV Season 5 Episode 8

A viewer emails: “re the current economic situation, doesn’t it stand that if austerity (i.e. cuts) work and investment (i.e. growth) doesn’t, then why is America’s economy doing better than your country’s and Europe?”

Sorry all, but supply-side economics is a fact.

Most political pundits and many politicians (of all flavours) describe “supply-side” economics as “voodoo economics” or the ramblings of “delusional supply-side fantasists”. But there's one problem.Whenever we get the stats in, it appears that the rate at which governments tax us actually have an effect on our behaviour, and subsequently on the amount of money that winds its way back to the treasuries.

When the change is small (say an income tax increase from 35% to 37%) there is almost no negative Laffer curve effect. But when the change is large (say a 10% increase or decrease) then this will have a more pronounced effect on government income. This simple economic reality – dynamic scoring – has for a series of bizarre anti-intellectual reasons been ignored and even ridiculed.

Well we've had some more hard data about this economic reality. Aside from this excellent summary from journalist Janet Daley, we've no one seemed to mention this when the data came in around November time.

Gordon Brown raised taxes on the higher earners from 40% to 50%. The effect? Millionaires who were eligible to pay at that rate (based on what they declared to the taxman as income) have – quite within the law, fallen from 16,000 to 6,000. The government has an estimated £7-£9 billion in lost earnings:

It turns out that the introduction of the 50p rate of income tax caused two thirds of those earning over a million pounds per year to simply disappear from the reach of HM Revenue and Customs. Whereas, under the previous highest tax level of 40p in the pound, 16,000 people were prepared to declare earnings of one million, that number shrank to only 6,000 after Gordon Brown, bless him, introduced the higher rate. Result: the Treasury actually lost 7 billion pounds in revenue.

It would appear that due to the worsening economy, and the higher taxation level both incentivising ways of getting around paying income tax at all, and also incentivising entrepreneurs not to bother trying as hard, the government has shot itself in the foot.

That's the funny thing about this supply-side “voodoo economics” that can't possibly be real: it has a tendency to actually be very real indeed.

 

The “Anglo-Saxon” Approach was not to Blame for this Mess

My local MP John Redwood has, in four basic points, eviscerated the myth that laissez-faire light touch regulation (or the so-called “Anglo-Saxon Approach”) was responsible for the banking crisis:

1. The European banking system is in a worse mess than the UK or US systems today. There is no evidence that the EU, Spaniards, Italians, Greeks and Germans suddenly fell in love with “light touch Anglos Saxon regulation” and made the same mistake, yet they ended up with more weak banks.

2. The volume of regulations expanded substantialy during the build up of the boom. The EU came into the game and added many pages of new financial regulation at their level, on top of all the extra regulations the UK and US authorities were issuing. The UK was governed by a left of centre administration which believed in the efficacy of more regulation. The FSA reviewed all past banking regulation and added to it.

3. The authorities themselves were enthusiastic proponents of the easier credit they allowed under their myriad of new detailed regulations. In the US a Democrat President promoted more mortgages to people on low incomes as a social policy, which led directly to the junk loans which jeopardised the system later. They called the crisis the “sub prime” crisis in honour of the loans advanced by mortgage banks and by a couple of state financing arms that were fully nationalised in the crisis. The UK government ran up big bills paid for by off balance sheet transactions called PFI and PPP in the spirit of the lend more age.

4. The UK administration was particularly keen on promoting the growth of Northern Rock, a North Eastern company, and RBS,a Scottish company, as they grew very quickly. They took pride in the huge expansions of their balance sheets, and in the way they used off balance sheet vehicles to speed their growth. In the good days these were northern and Scottish companies showing London and the south how to run modern banking and financial services.

I wonder if we’ll ever be able to put this myth that laissez-faire is to blame to bed for good? Sadly, I doubt it…

A Single Income Tax?

Matthew Sinclair of the Taxpayers Alliance makes the case for it in the Wall Street Journal. I have to say, I really agree with him.

 

More Facts on Our So-Called “Cuts”

 

I’ve never come across Allister Heath before. He’s the editor of City A.M.

He’s written some really remarkable stuff, and it seems like I’ve got a lot of back-reading to do. But I wanted to share with you this great editors letter he wrote entitled “It’s austerity all right – but not of the kind we actually need“.

 

You Call This Austerity?

Sorry for banging on about this all the time at the moment, but I think it’s really important that we understand what’s really going on right now.

This narrative that the UK and Europe are embracing ‘austerity’ i.e. shrinking government spending (which is causing the problems over here), and the US is embracing ‘growth’ (which is solving problems in the US) is nonsense. It’s totally the other way around.

Here’s a really great overview of the austerity myth presented to us by the insightful, thoughtful and intelligent Veronique de Rugy for Reason TV (with the ‘man in black’ Nick Gillespie asking the right questions):

More Reasons Why America is Doing Better Than the UK

It’s simple, it’s not that the US has a left-wing administration that’s increasing “investment” and the UK has a right-wing administration that’s imposing “savage cuts”. Okay, Obama has increased spending (and things would have gotten better faster if he didn’t) but overall, spending is down in the US (mostly because of the majority of state and local governments have been sensible).

In the UK, spending is still increasing. Certain departments have had cuts, but every single month of this coalition government has increased. And you combine that fact with our higher taxes, more authoritarian government and more centralised control, well, you see what you get. A mess.

And why has America done better? The New York Times explains all, with the help of this graph:

It’s the states wot’s won it, but the subsequent dip in unemployment and improving economy are going to be very useful to Obama in the forthcoming election…

The Future of Written Journalism

I don’t know why I’ve thought about this quite a bit recently. I’m a huge fan of the blogosphere, and I’m really excited by the possibilities of the new digital journalism steps being taken by the main newspaper organisations (like the extract replica e-editions of newspapers, available to buy on a very cheap subscription basis). I also love the new contributors to the scene, who have arrived perfectly placed to take advantage of the digital sphere, like The Daily and the longer-running Daily Beast, which of course merged with Newsweek.

But there are problems. What’s the best business model for these new outlets? How many people are embracing them? Journos are losing their jobs in droves, how do we stop this decline? And indeed, should we be concerned with stopping this decline?

Lots of questions, issues and anxieties. People way more knowledgeable and smarter than me have weighed in on this topic, and I wouldn’t bother contributing unless I thought I had something useful to contribute myself. I’ve got a couple of ideas about the best business models the print world could adopt, and I lay them out here, knowing full-well that I’ve probably missed something out really significant, but I haven’t heard these suggestions made before, so what the hell – here it is, see what you think:

I want to reference two different types of print media: newspapers and magazines. I’m defining magazines are anything that comes out periodically, but not daily. So a monthly, fortnightly or weekly release. Newspapers are (obviously) defined as anything that comes out daily. Clear? Great.

Okay, magazines first. Mags make money partially from advertising revenue, but given the lack of frequency of release (once a week, or once a month), and the lower circulation figures, advertising revenue doesn’t pay a magazines way. Magazines, by and large, make their money from the actual sale of the magazine.

So if you’ve got a magazine that costs £5 say, then about 50p goes on the printing costs (it’s obviously more expensive than a newspaper, all that glossy goodness), about 20p on the distribution, and I’ll guess a £1.30 commission for the newsagent. That means that the average £5 magazine makes about £3 for the publisher, and another 30p per magazine in advertising revenue.

So to create an equivalent digital version for iPads and other tablets, is pretty simple (assuming you don’t put all your content for free online. If you do, then you’ll have to follow the newspaper business model, see below for that). Basically, if you charge about £4.25, then minus Apple’s (or whoever) 30% commission, it’s still £3 per copy purchased, and you could charge the same for the ads, thus making the same amount of money for the dead tree magazine version.

But there’s a vital difference. Typically, newspapers charge a CPM rate for online adverts (Cost Per Mille, or cost per thousand readers), that’s 2.5 times higher than the ads in a dead-tree model. That’s because the ads can be dynamic, they can be more tailored and animated to suit the audience, and crucially, when someone wants to find out more about that product or service, they can just click or tap on the ad, and they can go to a website or video or virtual shopping cart or whatever.

So you can sell ads and generate 75p for the same ads in the digital version. So if you sell the magazine that retails in a dead tree version at £5, (which gives the publisher £3 + 30p = £3.30), you can sell the digital copy that’s exactly the same for just £3.65 and make the same money. (£3.65 minus the digital distributor’s 30% commission = £2.55 + 75p for ad revenue = £3.30 per magazine bought). And you can charge even less for the magazine and sell more which increases the ad and sales revenue further and makes use of an economy of scale.

Newspapers have a totally different problem. The toothpaste is out, and you can’t get it back in the tube. Without understanding what it really meant, the editors happily let the reporters and columnists at all the local and national news outlets publish their content for free online. They had to in a way, competing with all the amateur bloggers, etc.

So now the content is free online. No going back. The ad-revenue per thousand is better than a newspaper ad, but people dive into a news site, see a few pages, and leave. That means they’re only seeing a few ads, even if it makes the news organisation more money per ad.

With a newspaper, a client has to pay upfront for the total estimated circulation to see the ad, whether that was 100,000 people or ten million. And everyone who buys the paper, probably sees all 50-70 ads that are published in the edition.

Digital app-based versions can fix this. When you buy a copy of the electionic paper, it’s a really good and delightfully accessible version, and the purchaser will see all those ads, and those ads are more ‘valuable’ (ads you can tap on them and go to the company website, etc) but…

…But why would you buy it? Sure, they can sell them way cheaper than the paper versions, but all this content is mostly free online, and if you hide it behind a paywall, your listenership will just ditch you and go to your competition.

I think that the best thing to do is dramatically increase your circulation by making the app-delivery totally free. Now that means that lots of people who download the paper each day won’t necessarily treat the paper with the same reverence, but they’ll be way more of them, and they’ll see a hell of a lot of those ads. Let’s just (probably very inaccurately) go over some example figures:

A dead-tree newspaper sells for, say, 55p. Once you buy raw materials, (paper, ink, plates, getting all that stuff delivered to the printers), get the paper printed, get it distributed, and account for the commission from the newsagent, the paper makes about 5p. Obviously, you can’t sustain a newspaper on 5p, (especially as less and less people buy them – why when you can see it all online?), so they need advertising revenue to make ends meet. The average paper generates, say 50p of ad-revue per purchased copy.

Now each ad can be charged at 2.5 times more on a digital tablet edition, and even if someone doesn’t read each ad because they just browse (as it’s available free), you still negate that by having a huge increase in circulation, which will only grow as the paper versions vanish.

So if for a typical circulation, a paper that costs 55p generates 55p of ad/sales revenue. If the current circulation is a million say, that’ll be £550,000 of revenue per day. But if the average person only sees a third of the ads in the paper on the digital version, based on a 2.5 increase in CPM price and a conservative increase in circulation from one million to two million, you’ll see revenue of 40p per download. That means over 2 million downloads would give you £800,000 per revenue per day.

There’s probably a million things wrong with this long, inarticulate badly-written rant, but I can’t help feel that creative destruction will solve the current problems that written journalism is facing. And while amateurs and Twitter will now always be the first with breaking news, professionally produced and written journalism will still provide the high-value contextualisation that we crave. There’s a need for it, and I’m sure there will be a business model that will make it work.