Mythbusters: Brexit Edition

People have been clouded by scaremongering that has prevented us from getting to the real debate of Britain's EU membership, says Matt Walton. Today, he seeks to set the record straight on this key issue.

The debate surrounding the economic implications of Britain leaving the EU has so far been dominated by both sides trying to outdo each other in terms of scaremongering. “Brexit could cost £100bn and nearly 1m jobs” say the EU-funded CBI one week. “EU policies threaten to cost Britain £9,265” says the IEA the next. It is perhaps no wonder that many voters feel a little bit unsure about who to trust. The announcement this week that the government would spend £9.3 million on a pro-EU leaflet to every household meant that they had another organisation to add to that list of scaremongers. In this piece, I will attempt to draw together the economic arguments for Britain to leave the EU while rebutting some of the outlandish claims of the ‘In’ side. Before starting, however, I have a slight admission: My main motivation for wanting to leave the EU is not economic, but rather democratic. I fundamentally believe that we must leave so that we can hold those who make our laws accountable. However, given that this is an economics blog site, I will focus on the potential economic benefits which this country could enjoy.

Naturally most of the economic arguments surrounding the debate concern Britain’s trading relationship with the EU if we vote to leave. Trade is what the EU is all about after all, isn’t it? Campaigners on the Remain side have said that Britain would struggle to negotiate a favourable trading arrangement if we leave. That Britain is a relatively insignificant market for the EU and it would therefore be the EU which dictates the conditions of the deal, not the UK. This is incredibly misleading. Firstly, on the day that we vote to leave the EU, we become the EU’s largest export market for goods. Moreover, we currently export goods and services to the EU to the value of £228.9 billion per year whereas we import £290.6 billion of their goods and services (2014 figures). This means that we have a trade deficit with the EU of £61.7 billion. At a time when the EU struggles to shake off the remnants of the Euro crisis and when growth is still sluggish, can you imagine any desire on the EU’s part to forfeit this huge source of income?

Let’s suppose, however, that Britain does not reach a trade deal with the EU. A worst-case scenario, where the EU member states close ranks and say: “We won’t give you a trade deal, if you’re out you’re out.” Aside from being a particularly unlikely outcome, it’s also not a particularly damaging one for the UK. In this situation, the UK would revert to the rules of the World Trade Organisation (WTO). WTO rules dictate that tariffs on most goods must be between 1% and 3%. Let it be reminded that this is the minimum standard. In other words, almost negligible. The only areas where this is not the case is a) cars and b) agricultural products. 

But any tariffs the EU imposes on Britain will be matched by equivalent UK tariffs on EU products. Who makes wine and cars? Answer: the Germans and the French – the two countries who dictate EU policy more than any others. The German car industry alone, would be at risk of facing reciprocal UK tariffs on the £16 billion market for German cars in the UK. Almost 1/3 of the new cars sold in Britain come from Germany. You can be sure that, if we vote to leave, the heads of BMW, Mercedes, Volkswagen and the rest of the hugely successful German car manufacturers will be in Angela Merkel’s office the next morning saying “We need tariff-free access to the lucrative British market.” It is inconceivable, therefore, that a trade arrangement between the UK and the EU would not be reached.

If countries like Norway and Switzerland can prosper outside
of the EU, why not Britain?

“But”, cry those who want to stay in, “you won’t have access to the Single Market.” This is a valid point as far as the Single Market in terms of goods is concerned, yet our economy is not primarily goods-focused. David Cameron, in a column urging people to vote ‘In’, has claimed that 80% of our economy is made up of services. Though as he well knows, there is currently no Single Market for services. So the Single Market argument which he and others perpetuate cannot be relevant to the UK’s situation. Non-EU Switzerland, which supposedly doesn’t have access to the EU’s services market, exports five times per capita more to the EU than we do. If countries like Norway and Switzerland, two of the world’s richest and happiest nations, can prosper outside of the EU, maintaining friendly relations and trading with the bloc, without being subject to its constant over regulation, why not Britain?

Another argument peddled by the Remain camp is that British jobs would be at risk if we voted to leave. Their favourite figure to use on this comes from a report compiled by the National Institute of Economic and Social Research (NIESR) in 2000 which suggested that around 3 million jobs in the UK are linked to our trade with the EU. The methodology behind this is fairly simple to understand.  The UK’s exports to the EU are equivalent to 13% of our GDP. Thus, claim the researchers, it is logical to assume that 13% (3 million) of British jobs are linked to our trade with the EU. The operative word here is linked, however. The NIESR explicitly acknowledged that "there is no a priori reason to suppose that many of these [jobs], if any, would be lost permanently if Britain were to leave the EU." Plus, if you use the same back-of-the-envelope-type calculations for the EU, you find that between 5 and 6.5 million jobs on the continent are linked to their trade with the UK. Thus a trade deal with the UK would be imperative for job security in both countries.

I want to move away, however, from criticising the arguments of the ‘In’ side. Instead, let me spell out a more positive vision for Britain’s economy after we leave. After the 2 year negotiation period set out in the Lisbon treaty, and Britain is freed from the EU’s Common External Tariff, we will have access to world prices. These are typically 8% lower than prices in the EU. As a nation with a particular preponderance for imported goods, this will be a noticeable shift. The move from EU prices to world prices will mean that the cost of food and household goods will fall. Furthermore, this means that British firms will have access to cheaper factor inputs. The only result of cheaper inputs is that we, as a nation, become more globally competitive.

A departure from the EU’s protectionist external tariff wall will not just help the UK though. Currently African farmers, some of the most impoverished businesspeople on the planet face EU tariffs of 7.5% on roasted coffee and 30% on processed cocoa products, two of the continent’s major exports. Think what the removal of this barrier, at least on the UK’s part, will do for those same farmers. Tariff-free access to the UK market, the 5^th biggest economy on the planet, can only make them richer.

 

One of the most frustrating things which I am hearing as the referendum approaches is that people “don’t know the facts” or that “they haven’t been told enough about it” – the inevitable result of media and government hysteria most likely. You each have, at your fingertips, possibly the most useful research tool in the history of humanity: the internet. If you are undecided or wanting more information about the referendum, it can be as simple as watching a YouTube video, reading a newspaper column or watching Question Time on Thursday evenings. 

If you want to find out more about the case for Leave, I would recommend listening to Dan Hannan or Tony Benn, or perhaps even reading Michael Gove’s piece on why he is voting to leave. From the Remain side, David Cameron and Alan Johnson are the ones making the case most prominently. 

Ultimately, however, it will be your choice on June 23rd. The outcome will fundamentally alter the course of British politics. 

Whether we vote to leave or stay, there is uncertainty. Yet it is my strongly-held belief that leaving the EU is not a ‘leap into the dark’ but rather a ‘step into the light’, towards a more prosperous, more democratic United Kingdom.

What is your opinion on this issue? Should Britain stay in the EU or vote to leave? Put your opinions in the comments below!

The Cost of Chelsea's Failure

The past 10 months have been miserable for the blue part of South West London. From the very first day, Chelsea Football Club's season has been embroiled with controversy, instability and most importantly, failure. 



In any season of the Abramovich era, the scale of Chelsea failure would have been shocking- but coming after a season of winning the Premier League/Capital One Cup double with such comfort, no one saw this coming.

It's no difficult task to quantify Chelsea's overall lacklustre performance. Last season, with 30 games played, Chelsea were cruising in 1st place, with 70 points and a game in hand over second placed Arsenal, who were 7 points behind. The Capital One Cup was in the bag. This season, after 30 PL games, Chelsea are 10th in the league. On 41 points, and for the first time in a very long time, having drawn more matches than won. Elsewhere, the Blues were disposed of with relative ease from the Champions League and FA Cup by PSG and Everton respectively, and, well, it'd be better not to mention the Capital One Cup.

Now, much is made of the excesses of money in football- something that, no doubt, Chelsea have profited from massively over the past decade or so. But while this excess has rewarded success generously, it has equally put failure at a massive cost. Especially for a club like Chelsea, who have performed so consistently in recent years.

Premier League Prize Money 2014-15
[sportingintelligence.com]

Chelsea's Premier League struggles will cost them. Last season, the club won the largest ever Premier League prize bounty of £99m. Now, of course, any estimates of this year's prize money are totally dependent upon how we predict Chelsea will finish this year. If we assume merit payments (the portion of prize money dependent upon final position in the table) will stay the same as last year (in reality it will most likely increase, a little), Chelsea will lose out on £11m.

This won't be the greatest cost of failure this season, for Chelsea, however. Had Chelsea not lost to PSG and gone on to the final of the UEFA Champions League, they could have netted an extra £30m over the £18.7m they earned this year*. If they had won it, they could have earned up to £42m more.

But to be honest, while Chelsea were expected to go far in the UCL at the start of the year, few expected the Blues to win the competition- so perhaps these aren't the costs we should be thinking about. What we should be remembering is that, thanks to a terrible Premier League season, remaining in and winning the Champions League was Chelsea's last, thin hope of playing the Champions League next year. Knocked out of that by Paris Saint Germain, and now being very unfeasible that Hiddink's men will rise up the table to fourth from 11 points behind, Champions League football will not be visiting Stamford Bridge until at least August 2017. This has serious financial consequences.

It means that as substantial an amount of money won, even from such a disappointing campaign as this year's, will not reach the club accounts until at least the 2017/18 season. Even if they qualify for the Europa League next year, the prize money amounts for the two competitions are night and day. Tens of millions will be lost from Chelsea's failure to qualify for next year's Champions League, and this will most likely be the biggest financial consequence of the team's failures this season.

With chances of Champions League football next
season pretty much gone for Chelsea, we won't be
seeing similar celebrations any time soon.

To put these losses into perspective, remember that Chelsea Football Club, despite the footballing success and achieving its second highest ever turnover of £314m, lost £23.1m last season, with no particular massive expenditures to justify the loss. It's worrying to think that what the next two years have in store for Chelsea's finance when you consider such a loss, during one of the club's successful years.

UEFA'S Financial Fair Play Regulations are tightening for the next 3 years, allowing only a loss of €30m (£23m) to be incurred in each season. Now, I'm pretty sure the club would have some sort of way to avoid substantial consequences, even if they did break this rule. But if Chelsea were to fall foul of the FFP regulations next season and be punished, it would not just be a huge embarrassment for the club, but it could restrict their re-entrance into the Champions League, worsening the financial issues.

The Blues' finances will be made worse by the fact that this failure will necessitate the club to spend more, particularly on the acquisition of players. With a new manager coming in, the squad looking weak in a number of areas, and a number of key players set to leave in the search of UCL football next season, Chelsea will have to spend big this summer to rebuild the squad. It will be interesting to see how the club manages to balance finances- after all, investment is required to open up future successes, but in the short term will only worsen the financial situation.

Chelsea have some big investments to make in the near
future- not least the £500m renovation of Stamford Bridge.

Not only is Chelsea due to invest in players, but it is also working on a drastic renovation of its stadium, Stamford Bridge, a project expected to cost over £500m. Failure to get back on to track financially over the next few years will jeopardise this grand project.

This is, you could say, a pessimistic look at Chelsea's financial prospects for the next year or two. But, it is indeed a situation that the club must be aware of, and one that teaches us the perils of failure in football as well as the gifts of success. The bigger you are, the harder you fall- and while it is unlikely (hopefully!) that Chelsea will collapse as a result of this season's failures alone, the financial effect will no doubt be felt hard.

What's your opinion on this matter? Will failure this season leave Chelsea in the lurch for the future or do you think will they bounce back quickly? Leave a comment below! 

*Estimates made from statistics from Total Sportek.

'Brexit': Liberation or Suicide?

On Thursday the 23^rd of June, a referendum will be held on whether Britain should remain a part of the European Union. This referendum will not only be one of the most significant events in British history, but also in Europe - James Rosanwo examines the key knock on effects of a potential vote in favour of Britain's exit.

The result of this impending vote could shape the future of the United Kingdom, as Scotland and Northern Ireland are heavily invested in Britain’s membership of the EU and will no doubt bring their own membership of the UK into question. The departure of a heavyweight member would certainly have negative effects on it’s the European Union’s dwindling economic stability.

The referendum was called after Mr Cameron completed his supposed renegotiation of Britain’s stance in the EU at the European Summit in Brussels, where he claims he has won concessions on behalf of Great Britain. However, many doubt it may do little to sway the result of the referendum in his favour. Soon after the announcement, many government ministers stated their intention to either back Mr Cameron’s campaign to remain in the EU or do the opposite, with high profile MPs, the likes of justice secretary Michael Gove and London mayor Boris Johnson, boldly reinforcing their discontent with remaining an EU member, pledging their allegiance to the “out” campaign.

The question of Britain's membership of the EU has created
a rift between key figures in the Conservative Party.

At the start of the year, the chances of “Brexit” seemed unlikely. However, recent events such as the European migration crisis and the incessant euro decline, seems to have many Britons favouring an exit. Whether, however, this is a good enough reason to opt for total economic uncertainty instead is debatable.

Mr Cameron has confirmed that if the British people decide to leave the EU, the UK would apply for withdrawal under Article 50 of the Lisbon treaty. Article 50 states that the EU countries’ would negotiate a new agreement with the withdrawing nation over a period of 2 years. It also specifies that the withdrawing state cannot participate in these discussions, so in essence the terms of the deal are established only By the EU. Hence it will be a process that will most likely not be quick or pleasant; neither will it yield results that would be favourable to Britain. One thing guaranteed is that the EU will be desperate to show that a decision to leave will not have a painless outcome.

Many opposed to remaining in the EU still maintain that Britain is being hindered by Europe, believing that  as a country free from the EU it would have an open Economy that would continue to trade with Europe and the rest of the world. Many have offered the Swiss and Norwegian models as  potential solutions:

The Swiss Model: Britain would emulate Switzerland and would negotiate trade treaties sector by sector.

The Norwegian Model: Britain leaves the EU but joins the European Economic Area, giving it access to the single market, with the exception of financial services but exempting it from EU rules on agriculture, fisheries and home affairs.

In practice, however, these models would be very difficult to implement. At the bare minimum, the EU would only allow access to the single market in return for obedience to rules Eurosceptics are so eager to escape, meaning they would still most likely demand free movement of people and big payments to its budget before permitting access to the market. Nonetheless, to these “Brexit” campaigners these hardships would be worth it, if it meant regaining independence from Europe and British sovereignty. 

Yet again, this supposed liberation is not as advantageous as it seems. In essence, Britain would be trading a greater power for a lesser one; in exchange for their newfound independence it would be relinquishing its ability to have any real influence in global issues. What is even more alarming is the threat posed to the EU and the West as a whole. Both Britain and the European Union would be significantly weaker, and less of an ally as separate entities. The strength of the EU is crucial to the West’s duty of maintaining global stability, an ordeal which is becoming more and more challenging given the ever persistent issues involving Russia, Syria, and North Africa etc. There’s no surprise why Russia’s Prime Minister Vladimir Putin would have no objection to ‘Brexit’, whereas America’s president Barack Obama has already urged the British people to vote to remain in the European Union.  

Britain's exit from the EU could further empower the already
dominant Germany.

Germany’s dominance in the EU would also monumentally increase, making them even more of an influence not just in Europe but on a global scale. Britain, on the other hand, would be on the sidelines outside the EU, free from but still in fact constrained by many rules it would have no role in formulating. We would be an independent Britain, still dependent on Europe.

The immediate effect of a vote in favour of 'Brexit' could also be devastating in further ways. Prolonged uncertainty over the UK’s new relationship with the EU would discourage investment, particularly foreign direct investment given Britain’s status as the financial capital of the world and the effects of these fears are already being identified; for instance, the recent fall of the value of the pound.

Above all, one question remains: will Britons be enticed by the illusion of a sovereign and liberal Britain, or will they see reason in the idea that there will always be safety in numbers? One thing is certain however, If the UK separates from the European Union, the decline of the pound will be the least of their worries.

Pros & Cons #5: Britain's Patent Box

In recent decades, Britain has quite significantly lagged behind other developed nations in its level of innovation and, partly as a consequence, productivity. An active 'Patent Box' has been one of the British government's headline measures taken to try to stimulate the country's level of Research and Development. 

So, what is the Patent Box, and what are its pros and cons?

This graph (left) tells you a lot about Britain's need for more research and development activities. Showing the proportion of national income spent on Research and Development projects, it highlights Britain's lack of investment in innovation compared to the rest of the developed world. Not only is the British average expenditure less than the OECD average, but it has also remained worryingly stagnant compared to almost every other country- in fact, it has decreased in the past decade.

The aim of the Patent box is to address this: "to provide an additional incentive for companies to retain and commercialise existing patents and to develop new innovative patented products", according to the Government itself. 

The Patent box does this by granting a lower level of corporation tax (10%, as opposed to the usual 20%) to profits earned as a result of patented innovations. 

PRO: Incentivising Innovation

This is the headline pro, the main aim of the whole project. Data presented on the right highlights the fact that very few patent applications emerge from the UK, and a major reason for this is the high cost of patenting, something that only hits smaller innovators hard. A properly drafted patent application in the UK can cost up to £6,000, with no guarantee that it will be accepted- it's common that multiple applications must be made before the patent is accepted. And even this does not ensure the international security of the intellectual property- there are even greater costs that come as a result of trying to win a patent abroad. 

In Japan, on the other hand, the cost of a patent applications (including attorney and translation fees) comes to around 210,000 yen, just over £1300. So it's very likely that patent costs are a major reason for the gap in application numbers between the UK and countries like Japan.

While the government wants to do little about patent costs, the proponents of the Patent box argue such smaller businesses will be helped out by the fact that their returns to innovation could be significantly increased by the new tax incentive. This higher profit possibility could give more encouragement to innovators to take greater risks with their inventions and commercialise them.

CON: Favours Larger Businesses?

However, there is an argument on the opposition side that the Patent box system is too 'complex' to be of great benefit to these small, independent innovators, and instead favours the larger firms with access to greater resources. While some financial barriers to entry may be lowered by the tax breaks granted by the box, it arguably also raises some more. 

In order to benefit from the Patent box, there are a number of compliance measures that have to be taken by businesses- most notably, they have to track and allocate R&D expenditures and subsequent patents through to their resulting income. This means that a company has to determine, document and prove how much of their profit is directly as a result of each of their patents. This is something that is far easier for massive businesses that will often have a whole department just for tax, than for small up and coming companies. The Institute for Fiscal Studies is a believer in this argument, arguing that "this [the Patent box] will lead to a significant increase in complexity and compliance burden... administratively burdensome and difficult in practice".

The iPhone 4 featured over 200 patents- the recipe for
a Patent box pickle indeed.

CON: Complexity

There is a further argument that while larger businesses may be in a better position to cope with the additional compliance costs brought by the Patent box, they will not be in an ideal position either. 

Larger businesses are more often than not holders of multiple patents, and in many cases these are commercialised in clusters, put into a single product. Take the iPhone, for example- the iPhone 4 from 2011 was crammed with over 200 patents, ranging from patents on the touchscreen technology, to the battery, to the then-new retina display. Now, Apple aren't beneficiaries of the patent box because their R&D does not take place in the UK- but if they could, how would they apportion their massive profits from the iPhone to each patent to present to the taxman? It would be impossible to objectively say that, for example, 10% of sales were purely down to the new battery patent they won for the phone.

And this issue is not just with phones, but essentially any product that requires more than a single patent- whether it is a car, a factory machine, the issue of apportioning responsibility for profits objectively to individual patents is a massive issue that is generated by the Patent box.

PRO: Attracting R&D to Britain
The Patent box phenomenon started in 2000, when it was introduced in Ireland. France followed in introducing the scheme in the next year, and since then, Belgium, Hungary, Luxembourg, Netherlands and Spain all adopted this approach to stimulating innovation- making the UK a relative newcomer, with our patent box opening in 2013.

With so many European countries having such a tax incentive in place, it was very important that the UK compete effectively with its neighbours, so that it didn't lose out from R&D activities moving away or not coming to Britain at all because of preferential tax rates. Therefore the Patent box, even if it doesn't make Britain more competitive than the rest of Europe, prevents the UK from lagging behind.

However, it's important to note that this might not be such a strong pro as it seems, considering recent developments in the OECD, whose excitingly titled 'Base Erosion and Profit Sharing' (BEPS) scheme intends to tame the level of migration of businesses due to tax reasons. A consequence of BEPS has been that most European patent boxes have now introduced 'Nexus' clauses that require beneficiaries to have performed all of their R&D in the country whose box they are using. So, to benefit from Britain's patent box, a company will have to do all of its work developing a patent in Britain. This reduces the likelihood of companies moving in the middle of their research projects just to benefit from tax cuts, and ensures that the host country granting the tax cut benefits from all of the positive externalities (consequences) of the research.

Nevertheless, it is still important that the UK's Patent box remains competitive, especially when it is considered that some companies will take tax breaks into account when they are planning to set out on their research.

CON: Better alternatives?
The tax cuts granted by Britain's Patent box system loses the government an estimated £740 million in annual tax revenues, so it's incredibly important that this huge cost is allocated to the scheme that is most effective in increasing Britain's innovative competitiveness.

And many argue that there are far more efficient schemes, most notably the existing system of R&D credits. R&D credits reward businesses for research activity in general (as opposed to exclusively commercialised patents), by excluding as much as 150% of research costs from end of year profits. This may sound like a bad thing, but it just means that research expenditure (and a bit more) will be excluded from taxation- ultimately decreasing tax expenses and increasing profits of the company. According to the IFS, R&D credits are preferable to the Patent box as they are "given in proportion to the amount of investment activity undertaken", as opposed to the Patent box which rewards only the profits derived from the group of patented, commercialised research.

£740m is a massive amount of money to sacrifice every year, so there are further alternatives to the Patent box that could have real, long lasting and crucially sustainable effects on the UK's level of innovation. Investment in human capital is arguably the most important of these alternatives- investment in the people of Britain, through avenues such as education, healthcare and general infrastructure.

Investing in education would have massive effects on the level of innovation in Britain. A better educated population would increase the level of innovative activity going on, and the multiplying benefits of a well educated society would mean an initial short term investment could bring far reaching long term benefits. However, that is the issue for some politicians- human capital investment in general often incurs large short term costs, for mostly long term benefits.

Conclusion
One thing that is clear, in this debate over the UK's Patent box, is that this is not simply a case of weighing the number of pros against the number of cons. It's quite evident that the number of cons outweigh the number of pros- but what is most important to consider here is whether the positive impacts of the Patent box outweigh the negative ones.

From our perspective, the negatives outweigh the positives. The Patent box seems a good idea in principle, but in application its shortfalls are exposed. Notable is the burden its complexity places on both small and large businesses, and the scheme's targeting of commercialised patents rather than other forms of innovation (such as copyrights, trademarks, or non-commercial patents), but in our view its most significant downside is the opportunity cost. £740m is a massive sum of money, and it is highly likely that the British government could achieve its aims of increasing innovation in the country by distributing this cost between an improved R&D credits system and further focus on investing in human capital.

Can High Speed Railways Put The North Back On Track?

The proposed new rail service (named HS2) has got some people in Britain as frustrated as the current service it intends to replace- that is, very frustrated. Yet the government continues to claim that it will ultimately benefit people of the North, by bringing them on a more level playing field with the South and London. So, who is right?

What is HS2?
In a nutshell, HS2 is a planned new rail system that will connect the Northern cities of Leeds, Manchester and Birmingham and the capital, London, with high speed trains. Going up to expected speeds of 250mph, these trains will drastically cut travel times between the North and the South- for example, reducing the length of the Birmingham to London train journey from 1h21m to just 49 minutes.

How HS2 could bridge the regional gap...

This diagram highlights the impact of the North-South divide
in Britain. [The Sunday Times]

If you visit London, it can seem at times a country of its own, separate from the rest of England- with not just its own transport system, but crucially its own thriving economy. In 2014, Office of National Statistics data shows London's GVA (Gross Value Added, a measure of economic productivity) per capita was 42,666. This is a figure well over the national average of just over 25,000 and the North East and North West figures of 18,000 and 21,000 respectively.

There are numerous reasons for London's extraordinary economic performance, such as the presence of some of the world's biggest financial and insurance institutions in the City, but that's a whole other article. What is relevant here is that one of HS2's primary objectives is to redistribute some of this economic activity to the rest of England, especially the North. "HSR can rebalance the economy", according to the taskforce behind the project.

While London has thrived since the 1980s thanks to its blooming services sector, the North has suffered massively as a result of the outsourcing of the majority of the industrial employment that it had relied upon for the past century. Since the 1960s, industrial employment has consistently been falling in the UK- almost a third of jobs in industry were lost between 1983 and 2010 alone.

It is hoped that HS2, in connecting cities of the North with each other and London, will enable businesses to relocate or expand their activity from London to the North. With its extremely high property prices and costs of living, some businesses may seek to relocate to the cheaper but rapidly developing cities of the North if the quick, convenient transport links are in place.

According to consultancy firm KPMG, HS2 could also boost national productivity- creating an "additional output of £15bn per year for the British economy" by 2037.

...and how it could expand the gap....
While there is little debate over whether the North will economically benefit or not from HS2, there is a sizeable question mark over whether the project will effectively realise its target of reducing the regional economic inequality between North and South.

A report from the World Conference on Transport Research analysing the implementations of High Speed Railways in China and throughout Europe, concluded that the profit-orientated nature of the companies running the railway service may be to the detriment of the smaller economies currently along the railway lines from London to the North. According to Vickerman, Loo and Cheng, "the creation of profit-oriented subsidiaries to run high speed rail services may be incompatible with providing a level of service to all potential stations which can impact on their economic development". The idea is that to achieve the quick journey times, between London and Birmingham for example, the railway operators are likely to rule out smaller stations as economically unviable- thus having a negative impact on these smaller economies.

Research suggests that France's high speed rail system
has not significantly reduced regional inequality- in fact,
it may have benefit Paris disproportionately.

Furthermore, some argue that the development of high speed rail and other improved transport links between cities can further imbalance the economic growth in the country towards the city that is most economically developed- in our case, London. Evidence from France has suggested this may well be the case. The HSR rail between Paris, Lille and Lyon contributed to flight and train journeys to Paris increasing by 144%, and those in the opposite direction increasing by just 54%. This study by Daniel Albalate and Germà Bel concluded that HSR has not "promoted... economic decentralization from Paris".

Considering that costs of living are far less up North than in London, it seems reasonable that London would benefit more from an increase in workers. People who want to work in Manchester or Birmingham would be far more likely to live there already, than people who want to work in London. HS2 could open the doors to people wishing to work in London, commuting from the North, but there are very few people who would be willing to live in London and deal with the high costs of living, to commute to work in the North.

In Conclusion...
There is no academic consensus as to whether HSR can reduce regional inequalities. The Government's Sustainable Development Commission argues that "Ultimately, the fairness impacts of a HSR network will depend on the detail of implementation plans", almost acknowledging the argument that HS2 will not effectively rebalance regional inequality, but entertaining the possibility that it can succeed in doing so. However, evidence from implementations of HSR in other countries, such as in France, and the reasoning behind some of the World Conference on Transport Research's arguments suggest that while nothing is certain, in reality, High Speed Rail 2 would be more likely to tilt the game towards London and increase regional disparities within the UK. 

What Tesla Motors Must Do To Make The Model 3 The American Car Of The Next Decade

If Tesla Motors play their cards right, their upcoming Model 3 could be the defining car of the next decade.



The Model 3 could define the future of automobiles- a fully electric, tech-packed compact executive car from the Californian firm that is expected to go head to head with established models from Mercedes, Audi, BMW and Jaguar.

Its older, bigger, more expensive sibling the Model S is already doing a fantastic job of taking on Germany and Britain's finest- but it could be the Model 3 that brings Tesla Motors to the mass market. Especially because, as Elon Musk announced yesterday, it will start at just $35k. To make the Model 3 into potentially the best-selling car in the USA, however, Tesla will need to keep in mind the following things...

1) THE CAR
Of course, the most crucial factor. If the car is terrible, no one will want it. The car, of course, must be comfortable, spacious (for its class) and be practical- easy to use on a daily basis to ferry the family around, or go on business trips.

Design-wise, the Tesla Model 3 has some tough competition. The interiors of the Mercedes C-Class and Audi A4, two of its major rivals, are setting the benchmarks for the compact executive class of car, and in order to match these, Tesla will have to take into account some criticisms of the current Model S' interior quality.

The Model S has excellently capitalised on current
technology trends.

Technology is key, too. Tesla have already set a great example with the Model S- they have effectively capitalised on our modern habits, of spending time looking at screens (it has the biggest infotainment display of any car on sale today), and basically doing nothing (as well as driving itself on the highway, the Model S can now park itself and be 'summoned' back to you when you return). This autonomous aspect of cars is a massive trend right now, and with companies like Mercedes and BMW beginning to get in on the action in their more premium cars, Tesla needs to push on and implement these on the Model 3 to stay ahead in the compact executive class.


The most crucial factor, however, in the Model 3's sales may well be pricing. At a price of $35k (including incentives, potentially $25k), the Model 3 is set to be a bargain compared to its premium competitors. The Model 3 will be even cheaper than some of its non-electric rivals (see image), let alone its few electric/hybrid class competitors in the USA. So if the quality is right, Tesla can expect to cause some disruption to its competitors' sales.

The Model 3 will be cheaper than even the non-electric cars from its competitors BMW and Mercedes.

Given that the expensive Model S and new, even more expensive Model X have established Tesla as a premium carmaker, one could question whether such a drastically cheaper new model could tarnish this image. However, take a company like the phonemaker OnePlus- their phones are substantially cheaper than the competition, though the quality of the product and their branding and marketing is on par, if not better, than other phonemakers. Consequently, its image is not tarnished by the price of its phones, perhaps the contrary- they are in fact admired by many. It is possible that Tesla, if they maintain their marketing and branding efforts, could be in the same position.

The overall quality of the Model 3 will be crucial. If the quality is too poor, the Model 3 will not be seen as a viable competitor to the cars from Germany and Britain. And if the quality is too high, at such a low price, Tesla Motors runs the risk of cannibalising sales of its more expensive Model S. So, balance is key.

2) Infrastructure

Tesla has a sufficient number of Supercharging stations, but
will require a larger network if the Model 3 is to succeed
in capturing the mass market.

One of the biggest gripes about electric cars right now is that they are inconvenient to live with on a daily basis, primarily due to the (lack of) charging facilities. Of course, by the time the Model 3 comes out there will not be as many Tesla Supercharger stations as gas stations, but Tesla needs to prepare in advance for the potential growth of their customer base. Few customers will be persuaded to put down a deposit for a Model 3 with a promise of a Supercharger somewhere near them coming in the next few years. They want it to be there, ready for when they get the car. So Tesla needs to expand its Charging network sooner, even if for a short while there may be too many chargers. Because if the Model 3 succeeds, there won't be too many chargers for long.

Tesla Motors needs to prepare their production facilities, too. Production delays caused by a lack of preparation left some customers of the Tesla Model X waiting 3 years after having paid a $40k deposit for their car to be delivered. This had terrible implications for the company, contributing to Tesla Motors stock falling by 38% ($12bn) in market value so far in 2016 alone. With a far cheaper car like the Model 3, Tesla needs to anticipate the volume of demand and ramp up its production facilities far in advance of orders. People purchasing cars as expensive as the Model X are arguably more used to lengthy waiting times for their cars- the more mass market potential consumers of the Model 3, not so much.

3) Incentives
Tesla, unlike many other car companies, have established incentivising referral programmes for its cars in the past. For example, anyone who used a referral link from a Tesla owner last year would get $1000 off the price of their new Model S. The people who gave out the most referrals in each continent would receive a top of the range, 'Ludicrous' Tesla P90D Model S and VIP access to the unveiling of the Model 3. If you were the first person to convince 10 others to buy a Model S, you'd get a free Model X. And so on.

Tesla is developing its family of cars with the addition of the
Model X (right) and Model 3 to the Model S (left).

Perhaps with the Model 3, however, Tesla could introduce a more long term incentives program. Something I was pondering over was the idea of a 'Tesla Upgrade Program'. Here's the idea: you buy your Tesla Model 3 on a contract (giving monthly payments for 3-5 years), before you're offered the opportunity to give back the Model 3 and go up the ladder to purchase/lease a Model S, at a discounted price. Keep that for 3-5 years, paying monthly, before being offered the chance to get a Model X at a discounted price.

If you think about the typical expected buyer of a Model 3, this program could make sense for Tesla. Young professionals will no doubt be big buyers of the Model 3, people aged 27-35: lawyers, consultants, doctors, financiers. These people probably wouldn't be able to afford a Model S or X, but they could get into the Tesla brand through the Model 3. Then, as they get older, their salaries are likely to increase. They may also develop their own families, and thus the need for a bigger car- and they may well be able to afford it. So they upgrade to a Model S, then after another few years they could even need space for 7- so they upgrade to Model X. This incentive upgrade program would keep buyers of the Model 3 in the Tesla family, and adapt to the developing lives of these loyal customers. This loyalty will become incredibly important for Tesla in the coming future, as other carmakers catch up and begin releasing electric cars of their own.

To conclude, the Tesla Model 3 definitely has the potential to be a key player in electric cars truly becoming the norm in the US mass market. As long as Tesla makes sure the car is of a good enough quality, puts the pricing just right, develops the right infrastructure for the production and maintenance of the car, and perhaps establishes a good incentive program for buyers, it could become a, or even the, best-selling car of the next decade.

Please Note: All images of the Tesla Model 3 are purely speculative illustrations. The car is expected to be unveiled next month in March 2016.

WhatsApp's Excellent Business Move

WhatsApp, the popular mobile messaging service used by almost a billion people worldwide, has recently announced a massive decision that will affect all its users- for the better.



In what seems rare in a world of monetisation and prices generally rising, the Facebook-owned firm has announced that it will be making the application free to use- forever. The established system was that users got the first year free, and would pay 99p for each subsequent year of service (on Android, iOS users only paid 99p once for lifetime use). But now, we won't have to pay a penny for using the app.

So, the usual story of such a 'demonetisation' goes onwards with the app becoming home to various advertisements, and the availability of a 'premium' paid version without these. But, as promised many years ago by WhatsApp, there will be no such advertising, and no such paid version.

Some might be surprised that the company has sacrificed what seems like a sizeable subscription revenue, but this decision makes great business sense in multiple ways.

Firstly, WhatsApp is owned by Facebook, so it's not exactly desperate for greater revenues. The $19bn acquisition of the company by the social media giant reflects the fact that WhatsApp is not in shortage of money to further develop their app and services, so they can definitely afford to take a financial hit.
And that financial hit is not exactly substantial, either- with each Android user paying just 99p a year, iOS users 99p just once and millions of users still in their free first year, WhatsApp is not a massive money maker, especially for a business as wealthy as Facebook.

Furthermore, WhatsApp is replacing, rather than removing, its income streams. Plans have been announced to earn revenue from introducing a commercial side to WhatsApp- features that allow businesses to contact individuals via the app. In contrast to ads, these will be services that the user subscribes to- it is about functions such as "communicating with your bank about whether a recent transaction was fraudulent, or with an airline about a delayed flight". Unlike most advertisements, these services will actually be useful for users. And it has massive potential- as well as from your bank or airline, you could receive texts from your pizza place about your order being sent out, or from Amazon about the status of your order.
These businesses will be expected to pay WhatsApp for such services to its customers, thus enabling WhatsApp to continue making money- perhaps even more money than its past subscription model.

This is also a great PR move for WhatsApp. As mentioned earlier, it's rare for businesses nowadays to revert from paid to free services, especially without some form of advertising involved. And the move away from subscriptions to free service will enable a great expansion of the user base, especially in developing markets where access to debit/credit cards for payment may have prevented many users from signing up. Such a rise in user numbers would consequently make the planned expansion into services for businesses more lucrative.

Do you use WhatsApp? How do you feel about this change and the planned new commercial aspect? Leave a comment with your opinions down below!

Failures of The American Education System - The American Inequality Series #5

In this final instalment of the American Inequality Series, we analyse how responsible the USA's education system is for the nation's growing economic inequality.

The quality and level of education is seen worldwide to be a strong determinant of an individual's future socioeconomic status. 

fig.1

Take a look at this graphic (fig.1) from the US Bureau of Labour- a clear positive correlation exists between level of education and earnings, and a clear negative with the level of education and unemployment rate. 

According to the Institute of Education Studies, the median earnings for young adults with a bachelor’s degree was $46,900- the equivalent for high school dropouts was less than half, at $22,900. It’s been getting worse for high schoolers: those who have only graduated from high school have seen their real incomes decline by over a quarter in the last 25 years.

So a correlation can be observed, but is there a causality between the two? The general consensus among academic seems to answer yes- in a well-known study by David Card, of UC Berkeley confirms the causality, concluding that “individual returns to education are declining with the level of education”. Education was proven to be a major factor in unemployment during the recent recession- nearly 4 out of 5 jobs lost during the economic crash belonged to workers with a high school diploma or less. Furthermore, 63% of US jobs now require a postsecondary degree- up from 28% in the 1970s. So education, now more than ever, seems to provide a safety net from both unemployment and low earnings.

Sometimes even a bachelor’s degree is not enough: according to Elena Bajic, CEO of online executive job recruitment site IvyExec, “when an employment recruiter looks at an Ivy League degree, they will look at it more carefully”.

Nevertheless, clearly advanced education of some level plays a role in one’s future economic prosperity. The ‘American Dream’ dictates a desire for opportunity for all to become prosperous- so if education is a key (though not the only) to the door from poverty into prosperity, do all Americans have this opportunity?

fig.2

The greatest barrier for many Americans to college education (in particular elite the Ivy League elite) is financial. The Higher Education Research Institute at UCLA observed choices made by students with regards to college- in particular those who had been offered a place at their first choice. HERI noted that only 56.9% of students enrolled in their first choice college in 2013- and compiled the most significant factors for why so many students didn’t enrol in their first choice, even if they got an offer. Fig.2 shows the 4 most notable reasons- all of them centering around college fees highlights how much finances matter to students wishing to go to college.

Public colleges hold relatively little clout over the education ‘market’ of the USA. Only 5 of the top 20 universities in America are public (state-funded)- a damning statistic, though it must be considered that there are almost three times as many private 4 year institutions as there are public equivalents.

But there is still an increasing pressure among the young people of America to go to top universities- and the majority of these are private colleges, whose national average total fees (for a typical four year study) in 2013-14 were $40,917, $9,000 more than the public equivalents. 

Two conclusions can be drawn from this data:

1) The poorest of society are struggling to afford a college education, and therefore are more rarely enrolling. 

2) Those who are only able to afford a public college education remain at a disadvantage when it comes to post-graduate employment.

fig.3

Colleges have attempted to lower economic barriers of entry via financial aid; for example, 70% of students at Harvard University receive such aid from the college. 

However, the effect of this has been minimised by rapidly rising college tuition fees- fig.3 shows how in the past decade, fees have inflated at a rate disproportionate to most other goods and services- and at a strongly contrasting level to real household income, which has in fact fallen in previous years (fig.4). 

fig.4

This has led to a widening gap between education opportunities for the poor and wealthy. The wealthy are mostly in the best position to provide their children with good quality education, which in turn benefits their future income, so they can educate their children well, and so on.

Socio-economic mobility is not dead- successful ‘rags to riches’ stories are not unheard of- however for many lower class people the environment and opportunity is not present to help them succeed academically- and the state of the US jobs market means they often remain poor for their whole life as a result.

Pros & Cons #4: The Minimum Wage

The Minimum Wage is something that has often been a focal point of the left vs right debate over economics and the government's role in managing its economy.

So let's have a look at both sides: both at those who say the minimum wage is an unnecessary, harmful form of government interference, and those who say it is necessary for the welfare of the working citizens of developed nations.

PRO: Worker Protection

Arguably the most significant reason for the existence of a minimum wage is the fact that it can prevent the abuse of workers desperate for employment by lean, restrictive employers. People desperate for a job can often be manipulated by employers into jobs in which the employee is strongly underpaid, often resulting in these people falling into poverty despite being employed. The minimum wage seeks to prevent such people falling into poverty, by giving them a wage that is calculated every few years to be supposedly enough to cover living costs for an individual and perhaps one or two dependents.

A study done by David Neumark and William Wascher of the American National Bureau for Economic Research (NBER) concludes that "over a one to two year period, minimum wages increase... the probability that poor families escape poverty" due to the increase in household income post-implementation of the minimum wage.

A higher minimum wage could reduce the need of
food banks like this.

Not only does escaping poverty help those fortunate enough to climb out, though. According to The Centre for American Progress, raising the minimum wage from $7.25 to $10.10 would reduce money spent on federal food stamps by $4.6bn a year, lifting off a great debt on the government.


CON: Shrinking Wages

However, Neumark and Wascher are careful to explain that their findings suggest separate stories for the poorest in society (who will benefit) and the rest- notably those just above the poverty line, who they claim would be harmed by a minimum wage.
An argument exists that the minimum wage could create a 'vortex' effect around the poverty line- while sucking the poorer up to and perhaps over the poverty line, it could simultaneously pull down those above the poverty line.

One could argue that despite the 'spirit' of the minimum wage, that is to raise the living standards of the poor, it could conversely provide a benchmark of acceptable pay for people who should be earning more. A company may reduce the pay it gives to employees to the minimum wage, reducing the income of those perhaps just above the poverty line and according to Neumark and Wascher, perhaps even dropping them below.


PRO: Productivity

Prominent psychologist Ivan Robertson summed this up very simply: "Improved psychological well-being (PWB) leads to a more productive and successful workplace". The link between income and this psychological well-being is further explored in a study by Princeton economists Daniel Kahneman and Angus Deaton- they conclude that, up to an income of $75k, "emotional wellbeing rises with log income". This means that, to an extent, money does often buy happiness- particularly when we're talking about those on the minimum wage, a figure far less that $75k.

Combining the two conclusions of Robertson, Kahneman and Deaton, it appears that the minimum wage's effect of increasing the wages and thus living standards of those below it can indeed have the effect of increasing productivity in the workplace. Wage is ultimately a great contributor to job satisfaction- and the higher the job satisfaction, the higher the likelihood of an employee being enthusiastic in their work, being present when needed and ultimately being more loyal to the employer.


(?): Lost Jobs

The reason why there's a question mark on this one is because this is perhaps one of the most contentious points in the whole minimum wage debate.

Some argue a minimum wage forces businesses to spend more on staff, meaning many will have to reduce staff numbers to keep the wage expenditure from increasing too much. This means fewer jobs, and consequently higher unemployment.

Their historically low pay has left fast food workers
among the most sensitive to any minimum wage regulation.

According to the American Enterprise Institute, this was the case in Seattle in the first half of this year- during which an increase in the minimum wage to $11 was said by many to have been responsible for the post-recession record loss of 1,300 restaurant jobs in the area. Author of the report Mark Perry highlights in particular how 1,000 of these jobs were lost in May alone, following the minimum wage increase in April- "the largest one month job decline since a 1300 drop in January 2009, during the Great Recession".


On the other hand, there is much evidence to suggest the minimum wage has little impact on unemployment levels generally. A famous study by David Card and Alan Krueger from 1990 compared restaurant employment in neighbouring states New Jersey (where the minimum wage was set to rise) and Pennsylvania (where the minimum wage was unmoved). "We find no evidence that the rise in New Jersey's minimum wage reduced employment at fast-food restaurants in the state", the study concluded.

A study in the British Journal of Industrial Relations set out to test the results found by Card and Krueger in 2009, and concluded the same- that they saw "little or no evidence of a negative association between minimum wages and employment".


CON: Price Inflation

Card and Krueger's findings that minimum wages had little effect on employment, however, did not absolve the minimum wage of any negative impact. In fact, upon investigation they concluded that "much of the burden of the minimum-wage rise was passed on to consumers", when restaurants would increase their prices to compensate for higher wage spending.

The idea of price inflation following minimum wage implementation arguably discredits the notion that the minimum wage causes unemployment. Theoretically, it would seem more likely for a restaurant to not risk all the potential issues that come with a shortage of staff, but instead retain staff (on the new minimum wage or above) and instead make the customers pay for the new burden.

Many businesses have laid the blame for price increases on minimum wage increases. One high profile example was Mexican food chain Chipotle, who, following a minimum wage increase in San Francisco, raised the price of their menu on average by 10%. Here in the UK, following the announcement of a new 'living wage' of £7.20 last month, Whitbread (the group including brands such as Costa Coffee and Premier Inn) announced they would be raising prices as a result of the supposedly "substantial cost increase" of operating as a business under the new minimum wage.

One could argue that such price inflations are simply selfish acts of protest by these businesses against minimum wage regulations that increase their expenses. It probably often is the case- but whether it is a selfish or 'necessary for survival' move, either way prices do increase for us as consumers.

Franklin D. Roosevelt championed the minimum
wage in an economically struggling USA.

PRO: Economic Stimulation

The minimum wage could have positive effects for the national economy, firstly in the form of stimulating consumer spending. A study by the Chicago Federal Reserve Bank examined 23 years of household spending statistics, concluding that for every dollar the minimum wage increased, the average worker received an extra $2800 for consumer spending. The 2009 study noted that spending on cars in particular increased as a result of increasing the minimum wage.

President Franklin Roosevelt was a huge proponent of the minimum wage for this reason- he famously stated "the best customer of American Industry is the well-paid worker", during his push to enact the federal minimum wage in the USA in 1938, during a recession following the Great Depression.


The Minimum Wage- Help or Hindrance? Put your opinions in the comments below!