The failure of the high street

Shops with physical premises should be subsidised

Today brought the news that HMV is going into administration.  It is the latest in the line of high street failures which has included the downfall of Woolworths, Comet, and Jessops.  Essentially (though not exclusively), these firms have lost business to online competition.

High street stores provide a classic case study in positive externalities.  Everyone likes having them there (I presume; otherwise what is driving the clamour to 'save the High Street'?).  They are often pleasant to wander around, and it is nice to be able to hold products in your hands.  It is also viewed as good for the community to have a busy high street, and there is an "insurance" benefit of knowing that you can get something immediately in a store if you need it at short notice.  But people no longer spend much money in these stores, often preferring to go home and buy what they saw in the shop online.  The social value of the high street is not captured by the firms, and some of them go bust in the absence of sufficient revenue.

If we are to preserve the social value they create, this must be addressed.  This means compensating the firms for the value they generate yet cannot capture.  Economics 101 says that goods which exert positive externalities should be subsidised.  There is thus a case for subsidising - or at least reducing the taxes of - firms with physical stores.  This could be done, for example, by reducing rates (a kind of council tax for businesses) on shops.  Online sites may be cheaper, but Amazon will never provide the satisfying experience of browsing and exploring which many currently get for free.

The EU is not a priority issue for voters

What is driving the Britain-on-way-out headlines?

For several months now, there has been a debate raging in the UK over the costs and benefits of European Union membership.  This is puzzling, because voters have not ranked the EU as an important issue in years. Indeed, recent polling by Lord Ashcroft, discussed here by Mike Smithson of politicalbetting.com, shows only 17% of voters naming resolving Britain's future with the European Union as one of their top three priority issues.

Why, then, is there now near-constant discussion of Britain's relationship with Europe?  The immediate cause is probably that the UK Independence Party (UKIP) have been doing well in the polls, overtaking the Liberal Democrats in several.  This could be the result of many factors that are not an obsession with Europe: a right-wing disgruntlement with the coalition, and the need for a new outlet for a protest vote given the Liberal Democrats' role in government, are the most obvious two.  Indeed, only 27% of those considering voting UKIP name Europe as a priority issue. UKIP's rise has got the Tories running scared, as they have been the ones losing most support to Nigel Farage's party.  This has given right-wing Tory MPs an excuse to vocally demand more Euroscepticism (which they want anyway), without regard for the true priorities of voters.  The prevalence of Europe in the headlines due to the sovereign debt crisis has also stirred the pot.

The Ashcroft polling does reveal immigration as a priority issue for many, and it would be wrong to deny that immigration and European Union membership are closely linked. But the idea that most Britons are waking up every day and bemoaning "rule from Brussels" is clearly off the mark, no matter the headlines.

EDIT: It has been correctly pointed out to me that the poll I cited above is easily criticised on a number of grounds.  Apologies.  There is plenty of other, more rigorous evidence.  For example, Europe did not even register on the chart here , from the August Ipsos-Mori Issues Index.  Again, concerns about immigration do register strongly.

The problem with public consultations

The case of the RPI and the Carli Index

One of Britain's two main measures of inflation, the Retail Prices Index (RPI), is statistically flawed.  It uses a method known as the Carli Index, thought to overstate inflation by around one percentage point per year.  As Chris Giles notes in the FT, this method was ditched by Canada in 1978, Australia in 1998, and the US in 1999.

The Office of National Statistics (ONS) has been deciding whether or not to change our index, too. Today, it has announced that there will be no change, despite the widely acknowledged innaccuracy.  Instead, it will produce a more accurate index - the RPIJ - for those of us for whom the purpose of a price index is to tell us what is happening to prices.

The main justification given for their decision was that "there is significant value to users in maintaining the continuity of the existing RPI's long time series without major change, so that it may continue to be used for long-term indexation and for index-linked gilts and bonds".  This followed a public consultation which received 406 replies.  332 of these were against the change, but only 64 objections provided a statistical argument, according to the FT.

Who would gain and who would lose if the RPI was corrected? Aside from the obvious benefit in having accurate information on prices disseminated every month, the main gain would be to the British taxpayer, who would pay out less on index-linked gilts (government debt for which the interest payments depend on the RPI).  The main loser would be investors in that debt: those with large savings, and pensioners.

The latter group is obviously more concentrated than the former.  The costs of the innacurate index are spread across all taxpayers, while the benefits accrue to smaller numbers of people.  Given the time-and-effort cost of participating in a public consultation, it seems obvious that most of the people who bother to reply to such a technical consultation will be those with a vested interest in maintaining things as they are.  Public consultations are of little value in these types of scenarios, and should not be treated as a good way of measuring the costs and benefits to the public.  We don't have the details of the replies yet, but it is probably the case that a mobilised minority has stopped an improvement of policy that would benefit the (justifiably inactive, yet large) majority.

Incidentally, this is another case of the bias towards the old when it comes to public policy and media narratives, which will be the subject of a future blog post.  Further losers from today's announcement are students, whose debt repayments are also linked to RPI.  But how many students, this blogger excepted, are likely to have responded to an obscure consultation on the Carli index?