Well, they’ve fooled George Monbiot so job done, eh?
George Monbiot gives us an example of that neoliberalism that so disfigures our society. The massive profits being made by private companies in the children’s homes business. The problem here is as we’ve been saying for some years now. The numbers used are entirely deliberate distortions meant to lead people to this conclusion.
We should point out that this is not - not, repeat - about whether children’s homes should be supplied by profit-seeking corporations or not. Not from our point of view at least. On this, as so many other subjects, we’re wholly pragmatic. Whatever system works best is the one that should be used. If that’s capitalism, profits and shareholders then let’s use that. If it’s direct government supply then let’s use that.
So this is what I have learned. That nothing is now sacred. Nothing is too valued, too important, too vulnerable to not be hacked and stacked and used as fuel on capitalism’s bonfire. Inured as we are to the scorching of all we hold dear, turning children into commodities from which commercial ventures can extract profit stretches the boundaries of belief. Can it be true? Is this really how the system operates? Yes and yes.
Children in residential care, on average, generate £910 each of profit a week for the corporations that control them. Large commercial providers of children’s residential care make average profits of 19%, according to a report commissioned by the Local Government Association – an astonishing rate of return. Ordinary businesses do well to make 5%.
Who are these lucky companies? An Observer investigation found many of them are private equity, venture capital and sovereign wealth funds. Among the owners are the state of Qatar and the emirate of Abu Dhabi, whose care company in the UK, mostly investing in special schools, made 26.5% profits in 2022.
Running back through those three examples used, The Observer report we discussed here. They measure Ebitda, not profit. The average profits of 19% - that’s Ebitda, not profit. The £910 per week profit, that’s operating profit (closely akin to Ebitda) not profit.
To explain this as clearly as we can for those who might be a little baffled by accounting. Imagine that there’s an activity which requires both spending today and this week and also spending covering some years. We might call these current costs and capital costs. Or operating costs for the first set. Or even “now costs” and “then costs”. Say, given that our example here is children’s homes, we’ve the costs of the staff, the electricity, the food, these sorts of things. The bills come in every week - maybe every month - and have to be paid on that basis. We could call these current costs, or operating costs. We also have those longer term costs. Say, the cost of having a building in which a home can be. This could be interest on the mortgage taken out to buy it. There would be amortisation (ie, the capital of the mortgage being paid off). Depreciation - buildings do need maintenance, new roof every 25 years, repoint the brickwork every 50 and so on.
It’s a useful accounting technique to differentiate between these two sets of costs. So, we take those current, operating, costs off revenue and we’ve got something called “operating profits”. Closely aligned with this although not exactly the same we’ve Ebitda. Earnings before interest, taxation, depreciation and amortisation.
With our example of children’s homes we’ve therefore those two sets of costs - running the home and having the home. We’ve also those two possible measures of what’s left over after the costs of running the home but before the costs of having the home - either operating profits or Ebitda.
Those costs of having the home are substantial. As the CMA report George refers to points out, the average new children’s home has three kids in it. Given that at least some of the staff will sleep in even if not live in this means a substantial suburban house - possibly what might be termed a villa. A couple of million £ in London at least and certainly not entry-level first time buyer sort of place anywhere in the country.
The actual profit made by the capitalist b’stards is, obviously enough, the one after all those capital costs are also paid. Which is nothing at all like that £910 a week, that 19% nor the 26.5%. This is how all these reports manage to marvel at the profit margins and also worry that everyone’s about to go bust - the margins are measured before the cost of the homes, the worries about finances after them.
But we’ve had that series of reports over the years claiming these vast profit margins. As we’ve said before we think this is purely performative. A deliberate attempt to mislead and thereby influence the public debate. That several years’ worth of such reports have been funded by the Local Government Association leads us to believe that it’s a bureaucracy annoyed at someone else gaining their rightful budget.
But here we go, George Monbiot is now thundering on about it in a Guardian column so job done, right? The public is mislead, mal-informed, by that deliberate elision between operating profit and net profit, not including the costs of a home to have children in when estimating the profits of children’s homes.
Of course, it’s entirely possible for anyone who wants to to say that these details of accountancy are too complex to be bothered about. Phwoar, look at those margins! and decry events on that basis. Sure, it’s possible - but anyone who does that really has no place at all in critiquing costs and margins now, do they? Or even in commenting upon matters economic.
And now an actual and proper economic point from the Competition and Markets Authority report, the first of the three George mentions:
Comparing types of provision, we found that for children’s homes, local authorities’ operating costs were in aggregate approximately the same per child as the fees paid to large providers. However, the fees local authorities pay are higher than the operating costs from the private children’s homes providers in our dataset, as they also cover capital costs and profit. Based on our sample of 29 local authorities from across England, Scotland and Wales, we found local authority operating costs have been approximately 30% higher, on average between 2016 and 2020, than the equivalent for the 15 large private providers whose accounts we have examined. It therefore appears that the amount paid for a place in the private sector, even allowing for profits, is not higher than that paid by a local authority to provide an in-house place. Our analysis of our dataset indicated that the primary driver of these cost differentials was in higher staffing ratios and costs in local authority provision.
It is not entirely obvious that the capitalists are in fact making out like bandits now, is it?
We’ll let you know if George responds to this. Might not as he’s a book about the evils of neoliberalism to sell currently and it wouldn't surprise us if this is one of his examples. Could be a tad embarrassing as the book’s not just gone to press it’s on release.
The best of luck to all who try this
Just to try to capture neoliberalism - well, just good sense in fact - in a nutshell. Markets often work and when they do use markets. Markets sometimes don’t work and when they don’t don’t use them. A neoliberal is just any person who thinks markets work more often than you do.
With that in mind:
Yet for some patients with rare diseases, commercial interests are dictating who gets to access life-saving treatment and who doesn’t. Pharmaceutical companies have long been driven by global demand and the potential for the highest profits. In the past two decades, the market has exploded: pharma revenues worldwide have exceeded $1tn. For patients with common conditions, this investment in healthcare can only be good news. But the narrow focus of this strategy means that, in the UK, the one in 17 of us who will at some point be affected by a rare condition risk being forgotten.
OK - the claim is commercial pharma works just great for many things but doesn’t for all. So, where it doesn’t use some other system. We can’t see any objection to that.
However, it’s not, perhaps, quite as simple as is being portrayed.
Great Ormond Street hospital (Gosh) recently announced that it was taking the unprecedented step of attempting to obtain the licence itself for a rare gene therapy on a non-profit basis, after the pharmaceutical company that planned to bring it to market dropped out. If successful, it will be the first time that an NHS trust has the authorisation to market a drug for this kind of treatment. The move could act as a proof of concept for bringing drugs to UK patients that pharmaceutical companies aren’t willing to risk their profits on.
Ah, well, no. The development costs of a new treatment are high. It’s possible to have the most lovely arguments about how high, estimates range from “only” $500 million up to $2 billion. The vast majority of that cost being the testing regime and the seeking of authorisation and licence to be able to market. The new and interesting chemical is a small fraction of that cost.
The rare disease problem is that the disease is rare. Whether we use profit making companies, charities, government or whatever else to perform the task we do still want whatever it is that is done to be value additive. If we’re to spend $500 million (or $2 billion) we still want a profit on that expenditure - profit in the real sense, that the value gained from having done it is greater than the alternative uses of the same scarce economic resources. Whther that profit then becomes a profit to the capitalists or just the general value addition to society as a whole is an entirely secondary question. We still want the value from having spent $500 million to be greater than the $500 million spent. Changing who spends and how the $500 million, changing who gains that value added, doesn’t change that base calculation.
This particular rare gene therapy is for bubble baby - the absence of an immune system. The incidence is somewhere between 5 and 15 children a year in the UK. Spend $500 million to save 15 children? Well, maybe. 70 years of life from a one off treatment at $40,000 per QUALY gives us $2.8 million a treatment and $42 million a year in societal benefit. If the treatment can be marketed elsewhere as well then that cost per life saved falls precipitately.
But again, note that that calculation is the same whether it’s Great Ormond St or vile capitalist b’stard spending the $500 million. The problem isn’t the capitalists and their lust for profit. It’s the rarity of the disease being treated and the costs of gaining authorisation for the use of the treatment.
There is an easy way out of this of course. Lower the cost of gaining that authorisation. Cull the bureaucracy and so solve the problem - but doesn’t culling the bureaucracy solve so many problems, eh?
OK everybody, back to sleep
Unite the Union tells us that inflation - in fact everything that’s wrong with the economy in general - is because of corporate profiteering. No, really:
Thousands of UK companies have exploited their corporate power to increase profit margins since the pandemic, redistributing wealth from employees to employers and shareholders, according to the biggest study yet of data since 2019.
A trawl through the accounts of 17,000 companies by the trade union Unite found pre-tax profit margins were 30% higher on average in 2022 compared with the average across 2018 and 2019. Post-tax margins were on average 20% higher.
Werl, obvious, innit? There’s your problem. The capitalists are stealing it all.
In the actual report:
We've looked at profit margins before tax in 2022 compared with the average across the two pre-pandemic years of 2018 and 2019. We calculate the mean profit margin (see below) by dividing the total profit of all 16,600 companies by their total revenue. In 2022, the overall average profit margin was 8.3%. That is significantly higher than 7.1% in 2018, and just 5.7% in 2019. Averaging across those two years, profits increased 30% since the pandemic. Those figures are based on profits before companies paid tax. Profit after tax saw a smaller, but still large, increase of 20%.
It’s possible to wonder whether 5.7% was a good number to be starting with, whether 8.3% is too high now or a return to some welcome stability and so on. Eyeballing very slightly different measures of the same idea tells us that profit margins are significantly down on a decade ago. So it might well be that welcome return to a profitable capitalism. Which says something about this complaint:
Profiteering has gone hand-in-hand with under-investment. Have companies put their increased profits to use for long-term investment to rebuild our industries? Our analysis shows they haven't. In fact, investment has fallen.
If the returns to investing have risen - that’s the claim at least - then clearly we’d expect investment to increase - the gold piled up from doing so has increased and no one’s actually accusing the capitalists of being stupid, are they? If investment isn’t increasing at a time of risen profitability of investment then there might be something wrong with the numbers being used. And, of course, there is. The measure of “investment” being used here is only of reinvestment into the extant firm from profits made within that firm. Money paid out to shareholders that then gets invested in some other portion of the economy isn’t counted at all.
But the real issue here is that the numbers being complained about aren’t enough to explain the effects claimed.
The capital share of the economy is around - and about, you understand - 20%, or which corporate profits is about half. So, 10% of everything. That’s gone up by 30% or so - 3% of everything. The labour share (no, the labour share, not wages. The labour share is wages plus taxes paid on employment (both sets of NI) plus pensions contributions, plus, plus plus, all the compensation people gain from going to work) is about 70% of the economy. So, even if this effect is exactly as stated, that means wages are 4.2% lower than they would be without the capitalists carving an ever larger slice off the pig for themselves.
Sure, a 4% pay rise is nice, not having it is not nice. But it’s not an adequate explanation for everything that’s wrong with the British economy now, is it? It’s just not large enough to be the problem claimed.
Politics is the* reason industrial planning fails
Those who would plan the economy and our lives always do say that it’s far better that things are done democratically, by politics. Only the Rolls Royce minds of the civil service, so ably guided by the elect, can possibly guide the economy in the way that everyone would really want if only they were smart enough to know it.
Hmm.
Electric Vehicles: Tariffs will increase from 25% to 100% in 2024 (on top of a separate 2.5% tariff), the White House said, citing "extensive subsidies and non-market practices leading to substantial risks of overcapacity." The U.S. Trade Representative's Office said plug-in hybrid electric vehicles will be covered by the new tariffs but not hybrid vehicles.
So there are vast subsidies to electric vehicles, to make them cheap enough that people will buy them and so save the climate. But if anyone just actually makes cheap EVs and so saves the climate then they must be stopped from doing that by tariffs.
Biden’s national economic adviser, Lael Brainard, perhaps best summed up the purpose of the huge new tariffs when she said that they would ensure that government investments in jobs are not undercut by “underpriced exports from China.”
So, why’s that? Because this is an election year, it looks like it might be a tight race and the car making centre of the US is one of those tight, swing, states.
That is, the problem with politically determined economic plans is that the economic plans are determined by politics. Something for us all to remember the next time Professor Mazzucato barges through the door talking about industrial policy with strict conditionalities…..
*Possibly “a”
No, the Russians haven’t found oil reserves in Antarctica
It may well be that the Commons, or a committee of it, has been told that there are oil and gas reserves newly found in Antarctica but it’s really not true.
Russia has found huge oil and gas reserves in British Antarctic territory, potentially leading to drilling in the protected region.
The reserves uncovered contain around 511bn barrels worth of oil, equating to around 10 times the North Sea’s output over the last 50 years.
The discovery, per Russian research ships, was revealed in evidence submitted to the Commons Environment Audit Committee last week. The committee was assessing questions regarding oil and gas research on ships owned by the Kremlin’s Rosgeo, the largest geological exploration company in Russia.
Antarctica is currently protected by the 1959 Antarctic Treaty, which prohibits all oil developments in the area.
A major reason they’re not reserves is that last sentence of that quote. This is also more than the mere pedantry we’re so fond around here. The world simply will not make sense if you don’t grasp these differences. We’ve explained them, at book length, here. To give a simpler version just in case any politician is about to believe these claims of Russian finds of reserves.
Just one note, fossil fuel and mineral reserve definitions are slightly different but the base ideas apply to both.
Resources and reserves are things that are man-made. Deposits are not, they’re natural. It’s vital to grasp this.
So, a mineral deposit is that there’s something there in that rock. OK, fine, it’s there. A resource is when that something has been studied enough, tested, that we become reasonably (and there are gradations of “reasonably” leading to gradations of resource) sure that we can lift that mineral (or fuel) from that deposit in both technical and economic terms. A mineral reserve is when we have proven that we can extract, using current technology, at current prices, make a profit doing so and we’ve the varied licences and rights to be able to do so. Effectively, a “mineral reserve” is something proven up to the standard that a bank will lend against it or a stock market allow capital to be raised against the claim. That proving document is often called a Bankable Feasibility Study - proof enough to convince the bankers to unlock the vault.
The mineral deposit simply is - but those resources and reserves are man-made things. Created by applying the attention and capital necessary to prove the volume, concentration, chemistry etc of the deposit up to that financeable stage.
The importance of this is that people like the Club of Rome, varied environmental wowsers and idiots everywhere look at the volume of reserves - the man made things - and conclude that’s all we can have. Run out of those and we all die. The very slightly more sophisticated apply the same misinsight to resources. Both are wholly and entirely wrong - humans are unlikely to run out of things made by humans. The limitation is deposits, not resources or reserves. But as we point out at book length (again) there’s no shortage of deposits that can be transformed by that human effort into resources and or reserves.
But back to oil in Antarctica. These findings are all at a very early stage as yet so they’re not reserves and it’s doubtful that they’re even resources. Deposits, yes they are. But most importantly - a reserve is defined, in part, by the legal ability to extract and as oil extraction in Antarctica is illegal then any oil in Antarctica is not a reserve, is it?
In just the same way that all that lovely gas trapped in the Bowland Shale is not a gas reserve because it’s not legal to go fracking in England, is it? That copper at Bristol Bay is not a reserve because saving the fishies means no legal right to mine it. For while humans create mineral reserves by their actions humans can also - and do - destroy reserves by their legal and permitting actions.
‘The War on Prices’, a review by Dr Eamonn Butler
The Cato Institute has just published a new book that I (and others such as Deirdre McCloskey) have contributed to, The War on Prices: How Popular Misconceptions about Inflation, Prices, and Value Create Bad Policy.
In my chapter, I point out how, from ancient Egypt to the US and UK today, government efforts to control wages and prices have never worked. Price caps, minimum wages, limits on wage increases and all the rest have not stopped inflation, nor helped the poor. but have invariably created shortages, reductions in product quality (and ‘shrinkflation’) and black markets. In the end (surprise surprise), it is the poorest people who suffer most.
The book debunks the official narrative about the recent surge in prices and the cost of living. No, it wasn’t caused by corporate greed, or wage-price spirals, price gouging, or oil prices, or Brexit, or anything else like that. It was caused by the US Federal Reserve, the European Central Bank and the appalling Bank of England keeping interest rates down too far for too long, and printing too much money.
The authors show how minimum wage rises, which are intended to help poorer workers deal with the cost of living, simply price people out of jobs, particularly those who are young and unskilled. And even when there aren’t layoffs, minimum wage bills cause employers to cut perks, insist on less flexible work schedules, and neglect the work environment. Minimum wages are a very bad way to tackle poverty.
There’s much more of interest in the book, including analysis of price controls in World War II, Modern Monetary Theory, water pricing, CEO pay, oil and gas price controls in the 1970s, and much else. The book has received some excellent reviews to date, from a diverse range of economists and commentators. So order your copy here!
Council housing increases the unemployment rate
A useful little illustration of the problem that the planners always have - the world’s a complicated place.
John Harris tells us that:
Particularly in cities, selling council houses sooner or later eats away at places’ sense of stability and continuity: once buy-to-let landlords enter the picture, most tenants tend to become transient and disconnected from where they live.
It’s even possible to accept that this is a real thing. And yet. Council housing also raises the unemployment rate. The issue was raised by Blanchflower and Oswald:
We explore the hypothesis that high home-ownership damages the labor market…..We show that rises in home-ownership lead to three problems: (i) lower levels of labor mobility,
Lower labour mobility - less ability to move to where the jobs are - leads to a higher unemployment rate. Now, true, the paper looks at home ownership, not council houses - but they are something that doesn’t really exist in that US market analysed. For us we need to know that council house tenures are longer than private rentals (obviously) but also than direct ownership. Further, while it is theoretically possible it’s something that takes many years, if achievable at all, to move council housing across a council boundary. That right to housing does, after all, depend rather upon “a local connection”.
From the way that British council housing works this means that the effect upon unemployment is higher than mere home ownership.
Or, to put this the other way around, keeping the unemployment rate low (the structural that is, not the cyclical) depends upon there being some transience, possibly disconnection, in the labour force. Even, less stability and continuity.
As oft said, there are no solutions, only trade offs. One of them being that the less of the population we have in the current form of council housing the lower - at that resting, structural, state - the unemployment rate will be. Stability and continuity can indeed be seen as virtues - less so when the jobs are now three towns over of course.
The carbon tax is the cheap way to do it
Yes, yes, some don’t think it’s happening, others insist that leave be even if it is. But, leaping over those thoughts and to the important point, for we can all see that politics has its head up and the fools are going to do something. It’s then a duty to point out that the carbon tax is the cheap way to do it:
In 2023, the UK squeezed £52.5bn out of the economy in green taxes, a 4.9pc increase year-on-year, and it is now close to its pre-pandemic high. The revenue raised by green taxes has almost doubled since 2000. Within that, fuel duty is by far the biggest contributor, accounting for nearly £25bn.
The UK’s Emissions Trading Scheme – which seeks to reduce greenhouse gas (GHG) emissions in energy intensive sectors – now raises close to £6bn. Air passenger duty brings in £3.7bn, and the climate change levy – an environmental tax charged on the energy businesses use – close to £2bn.
OK. But what this tells us is that we already more than charge ourselves for climate change.
For, UK consumption emissions (no, not merely domestic production, but all consumption) are a shade under 600 million tonnes CO2-e a year. The Stern Review said that the appropriate carbon tax is $80 per tonne CO2-e. $48 billion a year, or £38 billion a year. But we already tax ourselves £52 billion a year for this same thing.
Well, OK, allow us just that tad of rhetorical excess in claiming that environmental taxes and the carbon tax are the same thing. But we’re pretty sure that £38 of that £52 is indeed upon carbon. And that’s before we get to all the other sillinesses like EV subsidy, boiler bans and all the rest.
We are already paying more than the cost of the Stern solution. Much more than the Nordhaus one. Very much more than the result from not quite swallowing the arguments about hyperbolic discounting and lower discount rates. But, given the political rhetoric that’s shouted at us, we’re nowhere near a solution.
Paying more than necessary but not achieving the goal? Ah, yes, that’s planning then, isn’t it? Exactly the thing that we’ve been told not to do. This is why the economists’ answer is that carbon tax - because it’s the efficient method of dealing with the problem as presented. Stick the answer into the price system and leave the market to sort out the rest.
Perhaps we shouldn’t worry all that much about the price when we’re out to praise Gaia - religious observance is often not really about costs after all. But that other economists’ observation (it’s in Stern for example). Humans do less of more expensive things, more of cheaper. Which is the reason that we have to be efficient about dealing with climate change - so that we’ll do more, not less, of it.
Shifting the UK from that current dog’s breakfast of plans to a simple carbon tax would be cheaper, more efficient and we’d end up doing more dealing with climate change.
Have we pointed out before that we prefer markets to political plans?
We, rightly, don’t do hypothecation of taxation
The amount that can be raised from taxing a particular activity bears no relation - none whatsoever - to how much should be spent upon some other activity. Therefore the tax - impost, charge, fee - upon any specific activity should not be devoted to some other specific activity. The British state has long said no to the hypothecation of taxation. It’s one of the - few possibly - things that the country gets right at that basic level.
A group of MPs are calling for a ticket levy on concerts at UK arenas and stadiums to raise funds for grassroots venues that are struggling with rising costs and the risk of closure.
No. That’s it, it’s as simple as that.
The amount that can be raised by packing the female teenage population of the country into the O2 for Taylor Swift bears no relation, at all, to how much - to use an example from the youth of one of us - Moles Club needs to stay open so that The Cure could play an early date there (alternatively one could have gone around to The Bell and seen early Tears for Fears, as, umm, one of us did).
No, think on it. If Taylor decides not to tour this year then does Moles need less money? Or she does, does Moles need more?
It is the hypothecation that matters here, not the idea of the taxation. These days - some will call it old bufferdom, others maturity - the idea of taxing Swifties, Cureists and Fears has a certain attraction. But that devotion of the money raised here to spend on this over there - no, that’s just not the right thing to be doing. Collect tax where possible, spend where necessary.
That you’re calling it a levy not a tax changes nothing about that logic. Tax concerts? Meh. Create an allocated pot of money? No.
George Monbiot doesn’t seem to know the facts here (Copy)
George Monbiot has a new book coming out, telling of the perils - no evils - of neoliberalism. There is something of a slight problem here, which is that George seems unacquainted with some basic facts about reality:
A vast amount of money has flushed through this country. Science has advanced by leaps and bounds; health and labour-saving technologies have greatly improved; we know exactly how to build good homes, treat sewage and improve democracy.
Instead (literally, in the case of our rivers) almost everything has gone to shit.
OK, rivers. England has had capitalist, profit seeking, water companies. Wales and Scotland varieties of non-profit and government owned. NI stuck with local councils then to government owned. The last time someone did a proper comparative study (OffWat, 10 years after these changes) prices had risen least, water quality in the taps risen most, effluent into the environment reduced the most, in England. Then Wales, Scotland and NI, in order of the march away from capitalism and profit.
For all the recent shrieking no one has in fact done a comparative study across the four systems. It’s entirely possible to say that England isn’t good enough, if that’s what you want to say. But is it better than the other management systems? That’s the important question and not one we’re being told - because there has not been that full comparative study. So to blame this all on neoliberalism is a bit difficult - as the best results we’ve got so far show that more neoliberalism does better.
Or:
If we keep working harder, one day we’ll pay for the public services we need; one day we’ll earn the economic security we crave; one day we’ll have more leisure time.
Hmm, leisure time. Anyone who tries to measure working hours without including unpaid labour in the household is going to get this wrong. And when we do proper time use surveys which do include all hours we find that leisure hours have been increasing. Divide the day into personal time (things others cannot do for you, sleep, washing, eating), household labour, market labour and leisure. The leisure hours are the balancing item after the first three. These have been increasing in these recent decades - heck, they’ve been increasing for centuries. And that’s before we get to longer childhoods and increased decades of retirement - both leisure in such a measurement. No group of humans, ever, has had as much leisure as the inhabitants of a currently rich nation - no, not even hunter gatherers (those estimations of 20 hours work a week are for food only).
Neoliberalism is an ideology that sees competition as our defining feature.
Snigger. A market transaction is a cooperation. Competition only comes into the decision over who to cooperate with upon which terms.
If George is so ungrounded in these basic facts then his critique of the world is going to have certain flaws, no?
We would like to be able to dig deeper into these flaws for you but for some unaccountable reason our review copy doesn’t seem to have arrived as yet. Tsk. We might even have to - shudder - buy a copy so that we can analyse it properly. Which, if necessary, we shall do, possibly even at book length.