Do the math…

Do the math… please, government, before you embark on this HS2 project.  Otherwise, in twenty or thirty years’ time it will come back to haunt you, or your descendants.   I won’t be around, nor will my own descendants (I don’t have any), but I promise this will happen.  There are two things you need to do, or have done, before you irrevocably turn on the green light.

The first is called a cost-benefit analysis.  There are two parts to this, which I’ll call tangible and intangible.   The tangible ones are those directly related to the project, to which you are sure you can subsequently ascribe monetary values.  What you do is divide a piece of paper down the middle, with a line.  On the left, you list the costs of the project, on the right, the benefits.  Obviously, at this stage these aren’t quantified, nor should they be.  The point is to make sure you’ve covered everything, every quantifiable cost and benefit, and that you will later be able to put a monetary value on it which you’ll be able to substantiate’: otherwise, it’s intangible.

Intangible costs and benefits are those you recognise you won’t be able to monetise, but which nevertheless have to be factored into the broad picture.  They’re the ‘what if’, ‘blue sky’, ‘OSINTOT’ factors.   Hint – if you’re using bullet or numbered lists, always leave an empty one at the bottom, there’s bound to be something else no-one had thought of.

Once you’ve done all that, then you can plug in some numbers.  This means putting monetary values on all the tangibles and, if you choose (and in this case you should), the intangibles too.  All these numbers, of course, have to be properly assessed, peer reviewed, and consensually accepted.  And then you can run what’s called a discounted cash flow calculation.  Here's how it works, but don’t worry – there won’t be a test at the end of this post.  Basically, what a DCF does is demonstrate, given the best estimates of all the variables, when this project is likely to go into profit.  It takes into account, crucially, the opportunity cost of the bottom-line option, which is always ‘don’t do it.’

Being an optimist, I assume the government (or whoever’s really in charge) has done all the above.  Well, you’d have to be really stupid not to, wouldn’t you?  So why don’t they just publish the results?

Oh.  I see.

Tax avoidance: something to add after all

Thinking further about this, I realised that at least one aspect doesn’t yet seem to have been discussed at all.  It’s this: what happens if all the loopholes get closed and the internet businesses are forced to pay their full corporation tax and whatever other dues they are currently dodging?  Will they a) hold up their hands, say ‘you got me bang to rights, guv’ and take the hit on their profits?  Or b) pass it on to their customers in the form of higher prices?

I suspect I know the answer, and here’s a clue: it’s not a).

If I’m right, what it boils down to is this: either the exchequer loses out, as at present; or the buying public does.  Makes the issue a little bit cloudier, doesn’t it?

Tax avoidance

Prompted by Z at the Razor-blade of Life, I was going to pen a rant on this subject, but Sir Simon Jenkins beat me to it here in today's Guardian.  Nothing to add.

An Awfully Big Number

If I read his comments correctly, my brother was commiserating with me for my misjudged hubristic choice of not one but two BMWs (consecutive not concurrent), as against a VW, Peugot or Daiwoo.  The following anecdote will I’m sure further boost his self-esteem.  Bear with me, this could take some time.

The car, a BMW 335i coupé, was only a few days old when I went the wrong way down a hill in Bradwell, Derbyshire, and heard a crunch ahead of me.  The bend was too tight and there was an invisible raised kerb.  As is my wont, I took it on board, made sure it was still driveable and carried on back home to Reading.  My usual approach to such situations can be summed up as a simultaneous ‘oh shit’ and ‘oh well’.

Over the next few years, the beemer’s front bumper acquired a few more scratches and scrapes, until about eighteen months ago I decided it was becoming embarrassing and took it in to the garage.  I was directed to the Body Shop, where I discovered that they didn’t use Tea Tree Blackhead Exfoliating Wash but instead simply scraped the skin off and repainted it, at a cost of £450.  I made my excuses and left.

So, one day last week, I’m parking up at Waitrose when I accidentally pull six inches too far over what proves to be my second, fatal, high kerb nemesis.  I have no choice but to reverse off, knowing what’s coming.  Sure enough, a familiar crunch sound.  The man parking two slots along shakes his head.  “That’s why I always reverse in.”  But then I wouldn’t be able to get the trolley to the boot; and what’s a kerb doing there anyway? and several other thoughts flash across my mind, before I splutter “Why do they make the kerbs so high?”  He shakes his head again.  “They’ll just say BMW make the cars too low.”

So it’s back to the Body Shop.  It’s the same man as eighteen months ago.  “You again?” he doesn’t say, though I can hear him think it.  We take a look.  By now I’m getting used to people shaking their heads at my car.  “The bumper has to be replaced.”  He doesn’t say ‘this time’.  He doesn’t need to say how cheap it’s going to be.  As we walk away, the £ meter ticking up by the step, he does a double take.  “Oh dear.  It’s cracked the wing too.”

So here’s the awfully big number, which will make my brother glad he chose a VW.

£1,637.64, plus VAT.  I really like the .64. 

It went in this morning, and will be ready Tuesday.  I have a nice little Citroen loan car, which I shall hammer the guts out of over the next few days.  And I had a polite call at lunchtime, advising me that they’d found a wee dent in a door sill and a scratch somewhere else, and would I like them to fix those too, for another £500.01? 

Why There’s a Eurocrisis

It’s to do with payment systems.  Bear with me.

In the U.K., payments between customers of different banks, or the banks themselves, are handled through a system called CHAPS.  Briefly, what happens is this.  Bank A needs to send some money to Bank B, so they send them a message – a payment instruction.  This message gets copied to the Bank of England, with whom both A and B hold accounts.  The Bank of England debits A’s account and credits B’s; B then knows it has the money and can dispose of it as per the underlying transaction. So far so good.

Until the late ‘90s, the totting-up took place once a day, after close of play, it being assumed that the system was based on trust and the Bank of England would carry the can should Bank A not cough up– until some bright spark there woke up one day and said “erm, actually, we won’t.  Because they might break their promises, and we can't afford the consequences.”  Thus was born the system known as Real Time Gross Settlement, or RTGS.

RTGS says, in effect, that Bank A must be able to afford the payment at the moment it sends the instruction to Bank B.  In other words, it must have the money in its account at the Bank of England, there and then.  If it hasn’t, it must ‘post collateral’, which means pledging items of value, such as securities, against this debt.  In practice, payments tend to flow in both directions during the day between A and B (and there are of course the equivalent of overdraft limits before the need for collateral kicks in).  So it worked fine for years.*

Then, enter the Euro.  After a few false starts, they realised that they needed something similar, covering the Eurozone of seventeen countries, and after a few false starts they came up with a system which is an almost exact replica of the above, but with an extra layer added at the top – in addition to the Banks A, B etc. paying their national central banks (Bank of England equivalents), the national central banks would also need to settle with each other.  Obviously, this would be done through the central banks’ central bank, the European Central Bank (ECB).  The system they put in place for this is called TARGET.**

What they forgot, though, was RTGS.  Remember that?  Cash on the nail.  Of course, TARGET provides for this within each country – but there is absolutely nothing that forces the national central banks – the countries – to settle with each other at the ECB.  No totting up at all, ever, never mind payment by payment.  Oh, and no need for collateral either.  Just keep running up the debts – and dues– for ever. 

 

Which is exactly what has happened.  So now you know.  That’s why there’s a Euro crisis.  No recourse for broken promises.

 

If only they'd asked me at the time!

 

* I do wonder how it coped with the events of 2007-8. Hmm ...

** TARGET2, to be exact, if you want to Google it – the Wikipedia article is excellent, though it does require a bit of concentration.

Morality anybody?

A government minister tells us about morality.  (I almost stopped there, but...)  Apparently, using legal tender to pay a debt is wrong, because it might cost HMRC money.  Apart from the dubious logic, and the frankly offensive implication that by paying my plumber cash I am morally tainted (not to mention Mr Gauke’s apparent confusion between legality and morality) here’s a bit of perspective.  A couple of numbers:

A: £6,300,000,000,000.

B: 92,000.

A is an amount of money (by no means all of it) being hidden away in so-called tax havens.  That’s six point three trillion pounds.

B is the number of individuals hiding that money.  That’s ninety two thousand people.

Divide A by B and you get £68,478,260.  Each.

Be aware that they are hiding this money for a single purpose – evading tax.  Before anyone starts bleating about the nice distinction between ‘evasion’ and ‘avoidance’, let me make my position clear - it’s all evasion.  The rules say that tax evasion equates to breaking the law, whereas tax avoidance consists of exploiting unintended loopholes in order to pay as little as possible while not actually breaking the law.  As far as I’m concerned, there’s no difference.

There’s a huge industry devoted to finding and exploiting these loopholes.  Here’s where morality really kicks in.  If the people in that industry were genuinely moral beings (complete humans, as I’m starting to think of them), then when they discovered a loophole, their first thought wouldn’t be ‘how can I exploit this?’ but ‘how can I help to close it?’  Wouldn’t it?

Governments wring their hands about this obscenity while doing nothing.  Why?  Why don’t they just confiscate it all and only give it back once it’s been proved that all tax due – morally or legally – has been paid on it?  What’s stopping them?  Only 192,000 people would object.

I have a lot more thoughts about this, but don’t worry, I’ll come back from Wales next week with a promise to lighten up!  And I’m genuinely looking forward to the Olympic opening show – if it’s anywhere near as good as Danny’s films, it’ll be a treat.

Bank Holiday

I think one’s overdue, don’t you?  But this time let’s big it up a bit. 

I don’t mean the sort of bank that looks after my money for me, pays my bills when I tell it to, keeps my diamonds in a safe, and charges me a reasonable, profitable fee for doing all that  (although there’s an unfilled niche market for one or two of those, it seems).  You know what kind of bank I mean.

On the news this evening, there was the entirely non-ironic juxtaposition, within minutes of each other, of the news of Barclays’(and, obviously, many others’) bent touts, under orders from their untaxed moral-free puppet-masters, having rigged fundamental market prices, over years – not just a rogue operative acting alone, even they recognise that one doesn’t wash any more – to their own benefit (and to the cost of the rest of the planet); and the fear that the forthcoming failure of the EU politicians, for the twentieth time (that’s not an exaggeration!), to sort out the so-called Euro crisis will (I quote) ‘panic the markets into hitherto uncharted territory’.

WHAT??  How much more of this sort of diarrhoea do they (I mean the Merkels, Osbournes and Diamonds) expect us to put up with? 

I have a modest proposal.  Shut down the capital markets, all of them, for say a fortnight.  Completely.  Worldwide.  Put all the touts on gardening leave.  And let’s see what difference it makes in the real world.  It’s not as drastic as it sounds – it seems to work on Sundays.

Why 50% tax is good for the economy

Let’s say you’re an executive who decides s/he wants to trouser an extra £60K.  We’ll assume that if this is taxed at 50% rather than 40, you will emigrate or withdraw your labour or something.*  Bear with me. )

So, you want an extra £60K, and you’re obviously desirable, otherwise they’d already have got shot of you.  So, under a 40% marginal tax rate, you’ll ask for and get £100,000 – 60 to you, 40 to the government.  Under 50% marginal, you ask for and get £120,000 – 60-60.    Either way, you get your £60K.

Here’s the good bit.  Your company is desperate to retain your services, as I said, and is happy to give you your £60K, but they have to raise the extra £20K to fund your extra income tax.  They could just put up their prices, but that doesn’t really work, because some smart competitor will come along and squeeze them out.  The best way is, in short, to sell more of their stuff, which is what they’re employing you for in the first place – which means economic expansion, which is what everybody wants, isn’t it?

I can’t see anything wrong with this, in fact up to a point, the higher the marginal tax rate, the greater the incentive towards increased economic activity.  There might be an inflation niggle somewhere down the line, but that’s the least of our worries at the moment.  I can’t imagine why the Chancellor hasn’t gone for it, can you?

The alternative trick, which I tweeted last week and which was hinted at on The Moral Maze this evening, is to make the 50% rate voluntary.  Shame the bastards into coughing up.  It might just work, self-esteem is a valuable commodity.

* So far, so unrealistic – what productive, motivated useful person would uproot and relocate, or turn into a couch spud, for the lack of £10,000, which is what it comes down to?  Multiply the numbers up and your case weakens, due to the economic law of marginal utility, which I wouldn’t dream of boring you with even if I could remember it. 

Everybody agrees

 The last refuge of the modern-day scoundrel is to establish the ground on indisputable quicksand.  I want to build a conservatory, or concrete over my front garden?  The last thing I want is people wondering why.  If they’re allowed to stray in that direction, I’ll never win.  So what I do is divert the argument into process rather than substance.  If I can achieve that – get them fighting over what might be the best way to solve my problem, rather than wondering what exactly that problem was in the first place – then I’ve won.  So establishing at (or ideally before) the outset, as a sine qua non, that ‘everybody agrees that I need more living/parking space’ is critical.

We can see this strategy unfolding by the day in several areas: HS2 and Boris Island, for instance.  As far as I can tell, nobody, but nobody, has questioned that there are problems, because ‘everybody agrees’ that we have to shorten journey times between London and Birmingham by however many minutes, or pump more and more air passengers through Britain on their way to somewhere else – because otherwise, well, that’d be a bad thing.

 ‘Our future success as a competitive nation depends on it’ is about the most cogent argument I’ve yet heard for these or many other similar proposals.  Nobody seems to be asking ‘hang on, before we even start talking, let’s see some numbers’.  By which I don’t mean fatuous made-up so-called benefit figures, I mean the simple ‘opportunity cost’ question: what will be lost if we don’t do this?  What will be lost, and by whom, and when and where, precisely?  It shouldn’t be that hard to work out.  After all, airport expansion projects have been proposed and rejected for decades.  The projected benefits must have been quantified at the time, and the actuals are obviously available.  But this has never, ever been checked after the money’s not been spent – nor, for that matter, does the converse get checked: what, for example, was the original business case for Concorde?

I think the promoters of projects of this kind should be made to put their money on the table.  If HS2 is going to produce net benefits of £1.80 for every £1.00 spent, then let’s see you commit (in the form of promissory notes, escrow accounts, whatever) £0.80, to be cashed in, one way or the other, when judgement day comes.  Any takers?  Thought not.

I may have strayed off the point a bit.  I apologise, I just needed a rant, any old rant.  And I was distracted by Victoria Coren on HIGNFY.

Alternating current account

Like many people, I pay for my electricity by monthly direct debit, spreading the cost evenly across the year.  As you know, the idea is that a surplus at the end of the summer covers the extra consumption during the winter. 

So when I got my six-monthly bill the other day I was pleased to see that they owed me about £150.  Good, I thought, that’ll see me through the next few months when it’s colder, darker and more boring.  The system’s working.  Then I read on.  “…which we will refund to your bank account on or soon after 6 November 2011.”  Hang on, though: that means that, come the spring, I’ll owe them money; and I bet they’ll put my monthly payments up in response, which means next autumn they’ll owe me more money, which they’ll refund, which means … you get the picture.  A positive feedback loop.

I remember a variant of this a few years back, when instead of issuing a refund, they proposed to reduce my payments over the winter, which would mean … oh, I can’t go on.  On that occasion I phoned them up and explained.  “Oh yes, the computer does that,” the call centre told me.  “We have to go in and override it.  We get this all the time.”

I don’t think I can be bothered to phone this time, but if I do I want a word with that computer.

Bearing Debts...

They've been on a bit of a bender,
The Eurozone's champion spender;
But the Oracle speaks:
"We shall bail out those Greeks;
Just one caveat: no referenda!"

Alternative lines 3 - 4:
But we'll bail out those Greeks
(and curate their antiques) -

We are the 99%

Have I got that right?  Yes, but it's a bit more complicated.  The 99% are the 2.6%, and the 1% are the 49%.  And % of what?  Those figures need to be swapped over.  Give 99% 49% and 1% 2.6%, and I guarantee we'll get more work done.

Ninety-nine plus one

Here’s an idea.  Over the last few days, I’ve seen various kinds of items priced at £2.99, or suchlike.  When decimalisation came in, in 1971, this was a marketing ploy to try and fool people that they were paying £2, rather than £3.  Obviously we all saw through that pretty quickly, and nobody falls for it any more, if they ever did.  But the practice has persisted; indeed, it wasn’t anything new even back then: I remember price tags such as £1/19/6d, and of course there used to be the pernicious guinea (which worked the other way).

So, instead of giving the customer the 1p change, let’s devise a system that feeds all those pennies into some kind of kitty (preferably local rather than central), which can then be fed back into the much-needed process of bottom-up economic recovery.  The vendor loses nothing, and the purchaser won’t really notice in the larger scheme of things.  Obviously I haven’t done the maths, but I bet there’s a huge amount of money involved.

And for those who want to opt out, we can always introduce a 99p coin.

Fiscal dilemma

I received a pile of envelopes from HMRC this morning.  I’m not going into details, naturally, but the upshot is that they've concluded that they have been overtaxing me for the past three years, and will be sending me a big cheque (let’s just say four figures, but I’m not telling you which four). I haven’t a clue whether they’re right, or how they know all this, given that I haven’t completed a tax return for at least five years, because they haven’t asked me to.  I’ll be showing it all to my accountant on Monday evening, over the second G&T, and I think I know what he'll say.

So where’s the dilemma, I hear you ask.  Well, clearly I don’t need this money, as I have comfortably survived the last three years without it.  So what shall I do with it?  I could donate it to Warren Buffett, just to ease the pain - but I don’t have his account number.  Or I could donate it to charity – but which one?  I could hand it back to the Treasury, requesting that they leverage it and hand the proceeds over to Mervyn to help out with the next round of QE – but I’m not doing that.  I could go down the shops  - I received a wonderful birthday card a couple of years ago:

Or I could just throw a humungous party.  But that’s a lot of disruption for you all.  Oh dear, I didn’t have this problem yesterday.

VIX

This is seriously loopy.  To put it simplistically, the Volatility Index is a measure of the levels of  'fear' in financial markets, using data drawn from the renowned and reliable, not to say infallible, ratings agency Standard and Poor's.  It's been around in Chicago for years.  So far, so pointless.  But the fun starts here: not only do they measure today's fear, they also calculate predicted fear levels in thirty, sixty and ninety days' time.  Fear futures, in other words.  And best of all, you can trade these futures in the marketplace.  You can buy and sell bets on how afraid market traders might feel by Christmas.  A quick search will put you in touch with people eager to help (at a price of course).

I'll shut up about that now, because my virtual pet snake has just started to eat its own tail again.

In other news, I understand that the markets are seriously jittery at the moment because they don't believe that governments are doing enough to regulate the markets.

And more importantly, have they found Yvonne the Bavarian cow yet?

The Cost of Nothing

My local council collects what they call green waste.  You get given a special green wheelie-bin, and once a fortnight a Vulture comes round and empties it.  They take the waste away, process it and compost it, and you can go up to the depot and buy nice bags of good organic peat-free compost at a very reasonable price.

Last March, everybody received a letter informing us that, from April, the council could no longer provide the free green bin service, and felt obliged to make an annual collection charge of £21.50.  Invoices for this amount would be issued during April.  We could, of course, opt out, but would have to make our own arrangements for disposal of our green waste.  Amazingly, some people chose that course, evidently calculating that the cost of the petrol needed to take it up to the tip for a year, plus the plastic bags and their own time, would amount to less than £21.50.  But most of us shook our heads in wry amusement and took the hit.

I personally thought this was an admirable scheme, fully in accordance with the spirit of modern economics.  It was rather like a sub-prime mortgage - in which you sell somebody something and then take it away from them, charging them for the privilege - in reverse.

Anyway, April came and went, and no invoices appeared.  For some reason, nobody seemed particularly surprised, and indeed most of us had more or less forgotten about it.  The bins continued to get emptied.  And then, early in May, there were some local elections, and the balance of power in my council changed.  'Ah-ha', we thought.  The first duty of a new government is of course to do its best to undo everything the previous one did. 

Sure enough, this morning the green bin collection team came down the road as usual, emptied the bins and delivered a letter, from the Interim Director of Environment Culture and Sport no less, to each house.  The Interim Director apologised for the delay in updating us, but was pleased to announce that it had been decided to 'abandon' this charge.  To quote:

'This means garden waste collections will remain free ...  If you told us at the time that you were not willing to pay the new charges you can still place your bin out for collection.'  And anyone who was nutty enough (there were some, apparently) to pay the £21.50 in advance will get a refund, in due course.

Without wishing to labour the point, I can't help wondering what the full cost was of this exercise in doing precisely nothing.

Do The Default

I have solved the world's financial problems several times here since I started blogging, but my proposals - abolish the financial markets, everybody join the euro, and so on - have been totally ignored.  I can only assume that this is because they are not radical enough.  So it's time to take the velvet glove off.

Somebody recently asked (in the Guardian, of course): if practically everyone is in debt, who do they owe it all to?  Nobody came up with the obvious answer, which is 'each other'.  And nobody has yet explained to my satisfaction how the inverted pyramid of piss which seems to be causing all this trouble came about, or why anyone puts up with it.  On the radio only this morning, I heard an apparently important person, from a position of some authority, explaining in all seriousness that the problem was that governments were not doing enough to convince the markets that governments were doing enough to constrain the activities of the markets.  I simplify, but not by much.

So, let's all default on our debts.  Let's all - countries, corporations, families, people - say 'nope, sorry, can't repay you.'  What would happen then?  Susan from over the road would ask me to lend her £350 to buy a new iBrow or something.  I'd say 'fine, I'll just nip next door and borrow it from Crispian.'  Crispian would gladly say yes, because he knew that Kimberley two doors up would be good for it ...  We'd all be happy, because we'd know that we'd be welcome round Susan's place any time to play with her iBrow.  And the people who make iBrows would be perfectly happy.

Pretty soon everyone would get fed up with wasting all their energy whizzing money faster and faster around the planet, and hunker down to making and doing things that are actually useful to each other. 

Meanwhile, I can't even buy a decent cheese grater.  The company that used to make them has gone bust.

Single currencies

There are two different sorts of economy in the Eurozone, which I can characterise (because I'm the one writing this) as Northern and Southern.  They have separate financial policies, because they're separate countries, but they are governed by a single set of interest rates and exchange rates, because there's only the one currency.  The only solutions to this inherent contradiction seem to be either to bust the whole thing up and go back to pesetas, drachmae, lire and escudos, or to muddle through somehow: which is the option currently being leant towards.  Both ways will lead to catastrophe.

So, how about the middle road?  Instead of fissiparating the Euro into seventeen old currencies, how about two?  We can call them the Seuro and the Neuro, if you like.  They get exchanged at a rate of 1:1 on the cutover date, then they go their own separate ways.  I haven't worked out the details yet, it's only nine-thirty, but I can't see any insuperable problems.  The Americans will be a hiccup, but heck, it's all their fault anyway; and the Irish'll just have to decide whether to jump into the Atlantic or the Med.