The Banking Crisis

 This is a bit less tongue in cheek, or even opinionated, than some of my other posts. The Banking Crisis was without a doubt one of the defining events of the first decade of the 21^st century. Its shadow still falls across discussions on politics, regulation, the role of the state, and economic theory. But despite that little evidence is publicly presented as to the causes of the crisis, or the long run costs it has incurred.  This is therefore an attempt to put some numbers on the costs to the taxpayers of ‘bailing out the banks’.

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A Note on Figures; The majority of this post is sourced from reports completed by the National Audit Office and the Treasury Select Committee, however, as a result of the this some of the figures are based around 2009-10 rather than 2010-11 or more recent.

Indirect and Cash

Stability was returned to the UK banking sector through two main mechanisms – direct (or cash) and indirect. Cash injections were used to buy shares and provide loans to (amongst others) Lloyds TSB, RBS, Northern Rock and Bradford & Bingley. These ‘direct’ interventions cost real money in the here-and-now, and, assuming no more major impacts to the system, it is predominately these costs which will need to recovered or written off by H.M. Government.

Indirect costs took the form of guarantees and indemnities provided through three special purpose vehicles (The Asset Protection Scheme, Credit Guarantee Scheme and Special Liquidity Scheme). Although significantly larger than the cash costs to the Treasury, these ‘indirect’ costs are only crystallised in the event of further default or difficulty in the Banking sector.  Peaking at a potential exposure of nearly £1 trillion (Maintaining the financial stability of UK banks; update on the support schemes. National Audit Office, Dec 2010, reference 676, Key findings) the possible costs of these guarantees have fallen to an estimated £512 as at the end of 2010.

I’m largely going to ignore indirect costs from now on.  Reports from the Treasury and NAO seem to suggest these guarantees are not going to be required, and many of the schemes are looking to wind down by 2014 (et al). This reflects a wider truth that the banking sector suffered from a lack of liquidity and confidence, rather than necessarily a paper bankruptcy (this is especially true for Northern Rock which was in a stable position on paper, but a loss of confidence caused it to fail due to a cash flow problem). The government stepping in with the ‘big guns’ of unlimited asset guarantees restored confidence, reduced the need for immediate liquidity, and ended the problem.

Cash Costs

The total cash cost of the bank bailout was around £133 billion (et al, Summary (2)) this covered the purchase of shares in RBS and Lloyds, and cash loaned to banks wholly owned by the government at this point (predominately Northern Rock and Bradford & Bingley). It also covers loans to various compensation schemes to cover client withdrawals.

These funds were not taken from other governmental budgets, but rather borrowed in their entirety. The National Audit Office puts the cost of servicing this debt at approximately £5 billion / year (or an annual interest rate of 3.76%). This on-going cost will exist as long as the loans and shareholdings remain outstanding.

From a practical perspective the bank bailout has therefore incurred a cash-flow cost of £5 billion per year, with the caveat that a future loss may be crystallised when the various share holdings are sold. This £5 billion forms approximately 11% of an annual interest bill of £46 billion (2012 Budget Executive Summary) or 0.7% of total government spending.

The likely losses incurred by a sell-off of the shares in RBS and Lloyds will depend entirely on the prevailing share price, and any pricing arrangements put in place to secure a buyer.  So, where does that leave us at present?

RBS

The calculation of the current value of the government’s holding in RBS is slightly complicated by the introduction of “B” shares in 2009. In addition to its holding of 65% of the ordinary shares in RBS, the Government also owns 39 billion “B” shares, created to allow a further injection of cash into the Bank without further ordinary share purchases. These B shares are valued at 50p each, receive a 250% preference dividend, and do not allow voting rights.

These “B” shares were issued at a value of 50p, which conveniently ties in with an approximate ‘buy in’ price for the government’s ordinary RBS shares of around 50p as well. All this means that while a line by line analysis of the government’s holdings is out of the scope of this post, we can get a reasonable estimate of the current position by comparing the current ordinary share price to 50p. Anything above would equate to gains come a sale, anything below a loss.

(Note; RBS had a 10:1 corporate action after the bailout, this means the ‘buy in’ prices for the government need to be multiplied by 10 if you want to compare to current prices).

At the current market price of £3.39, the government is facing a loss of 32%, or £17bn.

Lloyds

Luckily the Lloyds figures don’t seem quite so convoluted. The government bought a 41% stake in Lloyds for £21billion. This was entirely in ordinary shares, and therefore the published market capitalisation figure can be used to determine the value of a 41% stake. Using this approach a current value of £15.2billion, or a paper loss of just under £7bn is reached.

Options

The government seems to have several avenues on how to proceed with regards to its shareholdings. Although I’m going to provide some commentary on these, I’d highlight these are my own opinions, not quotes or paraphrasing from official sources.

1. SELL IT ALL!!
There is always the option for the government to just drop their holdings and get out now.  What this would actually do to the share price is troublesome, since it would almost inevitably precipitate a complete collapse in the already struggling shares, even assuming a buyer could be found. In practice this probably isn’t a realistic option.

2. Bit now, bit later

I’m putting this in for the sake of completeness, though it smacks more of a political move than an economic one. Selling off some of the holdings in the two banks would reduce the spectre of ‘state ownership’ and raise a bit of cash, but it would also lock in losses with comparably few tangible benefits.

3. Public-ize RBS

A rather radical move that was floated at one point was to just give the government’s shares to the taxpaying public. Probably a nice voter winner, but I have to agree with Vince Cable’s recent comments that this was unlikely to happen. Not only would this crystallise the full value of the bail out as a loss to the government, it would potentially hammer the share price when the markets become flooded with shares being sold by private investors.

4. Do nothing

Unless a single, large, buyer (such as a sovereign wealth fund) can be found, this is probably what’s going to happen. There is always the long run chance that the share price will recover, and once Lloyds and RBS find their feet they will begin paying dividends, which will largely go straight into the Treasury.  This is also what I’d personally advocate. Although both Lloyds and RBS have currently suspended paying a dividend while they repair their balance sheets and pay down liabilities, in the long run (it is an oft-quoted truth that shares should be held for at least 5-10 years), a return to dividend payments of around 4.6% (HSBC’s average yield), would both cover the costs of servicing the underlying debts incurred in purchasing the shares, and even offer a gradual net profit on the deal.

To Re-Cap

Just to bring all of these points together, and to provide a quick summary for use against the ranks of “Argh the government is collapsing because of the costs of propping up the banks,”

·         The Government provide around £133bn in cash to the banking sector.

·         That £133 billion was borrowed at an effective rate of around 3.75% per annum, incurring a servicing charge of £5 billion per annum.

·         For that investment the government got a stake in RBS and Lloyds which is currently worth around £24billion less than was paid for it.

·         That loss isn’t going to be crystallised any time soon since it looks improbable that a major sale of RBS or Lloyds will take place. As such the £24 billion is only a ‘paper’ loss.

If Today Were Year ZERO

Much is made, both in the media, and by people in general, about how the current social/economic predicament is caused by having to bail out the banks. What I hope the above has shown is that the actual, real, cash cost, of the banking crisis is currently around £5 billion a year. A fairly irrelevant figure compared to the £638 billion a year annual budget.

Another way of looking at this is that if all historic data, opinions and knowledge were wiped today, and then the government’s figures re-calculated based on outgoings and incomings today, the costs of the financial sector bailout would account for 11% of the national debt. While I would not try and claim 11% is immaterial, it means that 89% of the nation’s accumulated debt has to do with decisions unrelated to the bank bailout.

Seven Fat Cows, Seven Thin Cows

The concept of saving when things are good, to cover you when things go wrong has been around so long its spawned innumerable clichés. Never-the-less it’s a view which is largely ignored with regards to the financial sector. I’m going to wrap this analysis up by providing some figures to show that the financial sector provided far more in tax receipts than it eventually claimed in bail outs.

Unfortunately the readily available information available on the taxes paid by the financial sector only goes back to 2005/6. However, using this as a starting year, the tax receipts from PAYE and Corporation Tax (including the banking levy), as provided by HMRC (Pay-As-You-Earn and corporate tax receipts from the banking sector, august 2012, table 1), stand at £147 billion.

This figure alone covers the £133 billion cash bail out required, and that’s excluding the ‘boom years’ from the beginning of the 2000s through to 2005. While I don’t expect any government to simply sequester away huge parts of its tax take for the express purpose of then bailing out the economy when things turn sour, I do expect an acknowledgement that the government earned vast receipts from the financial industry throughout the boom years, and is still in a net position with regards to the banks.

Conclusion

In conclusion I’m going to reiterate a point that has run throughout this post. Financial costs can always be broken down into direct and indirect costs. However, much of commentary on the banking sector compares the theoretical ‘worst case’ scenario where all of the indirect costs materialise, with the immediate direct benefits (the £20 billion a year in tax the sector currently pays). Not only is this grossly unfair, it’s also completely misleading. Considering only the direct cash costs to the economy the bank bailout cost £5 billion a year. This is a trivial cost compared to the £120 billion a year spending deficit the current and previous government’s social and welfare policies have necessitated. Should the further £500 billion of contingent indirect costs be incurred we are envisaging a society where two huge corporations have been wiped out of existence taking all of their assets and holdings with them, where tens of thousands of business have gone bankrupt overnight, again without leaving behind any assets, and where entire cities worth of housing has vanished into holes in the ground. If we ever end up in that situation the problems of macro-economic government spending are going to be very, very, far down our list of priorities.

/Z

Nuclear Launch Detected

Britain's nuclear deterrent (Trident) is back on the list of 'hot topics' for the politicos. No new arguments have been introduced, no new figures provided, and no realistic alternative propositions proposed. Never-the-less the pro-nuke lobby once again has to defend Britain's final guarantee of its own independence. 

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In case anyone's not aware yet I'm very much pro-nuke. Nuclear weapons are, in the grand scheme of things, cheap, available and reliable. They have ushered in an almost unprecedented level of peace between the great nations of the world and limited conflicts to border squabbles or asymmetric conflicts.

But there are always detractors, and here's what they say;

Cost
What's most concerning about the cost of nuclear weapons is not the actual number, but how many people thing it’s vastly more than it actually is. I've talked to plenty of people who seem to be reasonable well informed who have some warped view that Trident takes up the vast majority of government spending, and it’s primarily spending on things like nuclear weapons which mean the bus services are underfunded and the education system is broken.

To set the record straight on this once and for all, the incumbent defence secretary recently priced Trident in at about 5-6% of the defence budget annually. Using the 2012 budget figures that’s about £2-£2.4 billion a year. That's a lot right? Well... yes and no... This is how that figure compares to some other areas of government spending on a per year basis;

£2 billion per year is:

4% of what we spend on debt interest
2.2% of spending on education
1.5% of the NHS' budget
*Less than 1% of welfare spending*

To put that last one in an alternative context, Trident delivers a 'gold standard' second strike, continuously-at-sea, ballistic missile system, creates around 7,000 jobs in the UK, supports significant investment in British naval companies and infrastructure... all for less than 0.3% of the total annual budget or less than 1% of what we, as a country, spend in welfare benefits.

Useless Weapons
For those perhaps unwilling to try and argue the costing of Trident, an alternative line of enquiry presents itself - to claim that nukes don't do anything, and therefore we don't need them. You can't prove that nuclear weapons are necessary because by their very nature they are preventative. It is difficult to find evidence of things that didn't happen.

This point then splits into two strands, 1.) We can't nuke the kind of enemies we are currently fighting, 2.) We wouldn't end up in a situation where we would want to nuke the people we can nuke.

So in turn,

1.) Nuking Somali Pirates
 Nuclear weapons are by their nature the strategic super-weapon of industrial warfare. They are designed and intended to wipe countries off the map, not specific people. In the current world of asymmetric warfare nukes are pretty useless.  You can't respond to five guys with an AK-47 in a $100 speedboat kidnapping some bank manager from Tunbridge Wells by wiping out half of sub-Saharan Africa (or at least you can but it would be somewhat overkill).

This argument holds water, in that it shows we shouldn't rely on nuclear weapons to the exclusion of everything else. But, you know what? We don't! Our nuclear arsenal only accounts for 5% of our defence spending, and we have plenty of other toys to deal with the current problems. If those alternative assets are proving insufficient that may be an argument in favour of increasing special forces funding or drone strike facilities, but it doesn't touch on industrial state total war in the slightest.

2.) We don't want to nuke Washington
The second argument is that why have nukes (designed to flatten industrial nations) when there aren't any industrial nations we are likely to be fighting? Although it might not look like it on the surface, this is actually one of the most compelling arguments in favour of nukes.  Remember - nukes are about STOPPING wars, not winning them. This is doubly true for systems like Trident which are intended, and touted as Second Strike (for those not familiar with Cold War terminology, First Strike weapons were intended to destroy an opponent's population, military and industrial centres, and completely annihilate their own nuclear weapons, both any retaliation could be mounted. Second Strike was designed to be able to respond regardless of the devastation caused by a First Strike weapon. Trident is very simple in this respective, at any given time we have at least one nuclear armed submarine on patrol somewhere in the world's ocean. It really doesn't matter how totally you wipe out Britain, that submarine will eventually get to you, and when it does you get wiped out in return.)

Instead of looking at the here-and-now in a vacuum, consider why we don't want to go around nuking other countries? Because since 1945 the nuclear armed powers of the world have known they have to work together. For thousands of years countries always had the option to just call up their troops and go quash someone over the border. That age of the world has ended (or at least between nuclear armed powers). Does anyone seriously think that without the threat of nuclear confrontations the US and Soviets would have avoided a war? Or the Soviets and Chinese? Or how about a resurgent British Empire, still basking in post-war territorial acquisitions and without the threat of nuclear weapons?

Europe has enjoyed seventy years of genuine peace. You can put this down to the EU, or the League of Nations, or everyone just being nice chaps. You can also put it down to the fact that a third great war in Europe would have ended up in a nuclear fireball extending from Poland to Wales that no one wanted. In practice it was probably a bit of all of those factors, but don't for a second dismiss the role played by nuclear weapons.

Ahh yes! Cry the disarmament committees, but now that we have stopped fighting, we are all getting along like good buddies, why keep the weapons? They've done their job, now lets stop paying for them. The counterfactual to this is fairly simple, and what happens when only one person is left with nukes? At that point what's to stop the wars happening all over again? Long shot? Maybe... worth spending a third of a per cent of our tax revenue on? I'd say yes.

(And just to consider - is human history really resplendent with examples of cultures, countries and peoples taking a step back from war just because they got along 30 years ago?)

Alternatives
As ever some people try to hedge. They want nuclear capabilities, but not something as ""expensive"" as Trident (no doubt so they can then go on to increase unemployment benefits by another half % above inflation to buy votes). The current front run seems to be some kind of Cruise missile system. I'm going to put it out there and say that sucks.

I found an estimate of Cruise at £5 billion, or a saving of £15 billion over the 10 year procurement cycle. That £1.5 billion a year represents about 3.75% of the defense budget, or 0.2% of the total government budget. Whether you consider that significant or not I supposedly depends on which areas of government spending you consider sacrosanct. Delivering a cost saving of 1% on the welfare budget would deliver bigger absolute savings, as would a 1.2% cost saving in the welfare budget. Personally I think a 1% saving in welfare seems more reasonable than a 75% reduction in the nuclear budget. Given this, along with the points above under 'Cost' I'd argue that the £15bn, over a 10 year cycle in which our government will spend  £6,380 billion is neither here nor there.

In terms on functionality then what are we losing?

The first is a continuous-at-sea resource, a Cruise replacement would only put to sea under normal operational conditions, and at times all nuclear armed submarines would be in dock simultaneously. This reduces the system as a credible threat to a rational opponent, and opens the door to a First Strike weapon capable of eliminating Britain, and her nuclear arsenal, without the risk of retaliation.
 Again, how 'likely' this is to occur is open to dispute, though where the country being wiped out in a nuclear attack is concerned I'm inclined to err on the side of certainty.

Next up Cruise itself is more open to being intercepted and 'shot down' than a like-for-like functionality with Trident. This is a similar problem to the point above, the more confident an opponent is that they can counter our Second Strike; the more likely they are to launch a First Strike. Is that risk really worth such a neglible cost saving?

The final point is an interesting one about ''accidently'' starting a nuclear war. One of the biggest worries about nuclear war is the pace it happens at. World War 2 took seven years, for at least 2 of which is was pretty obvious what the outcome would be. Iraq has been dragging on for 11 years. Leaders in these conflicts could take hours, even days, to formulate a response. The decision to retaliate against a nuclear strike may have to be taken in minutes, even seconds, and at those speeds there is a risk of it going wrong. Cruise increases that risk by making it difficult for a nuclear adversary to distinguish between a conventional Cruise missile with an explosive warhead, and a nuclear Cruise missile. Therefore, in the few seconds before impact, a leader may incorrectly assume a nuclear strike and respond in kind. Trident isn't entirely free from this risk, but at least the use of specific missiles and delivery systems, openly known by the other nuclear powers, reduces the risks of 'accidents'.

As a replacement then Cruise is less reliable, more prone to bringing about accidental nuclear war, and delivers a cost saving sufficient to keep the NHS running for 4 days a year. Hardly impressive.








 

Doffing the Cap

There is a trend in the media, in politics, even in the population as a whole, to down-talk Britain's position in the world. With the latest round of the EU debacle coming to the fore, with Israel once again bringing the middle east to the brink of general war, with the US making noises about withdrawning from the European theatre to focus on the East, there has been plenty of opportunity for the nay-sayers to remind everyone, at volume, that Britain is no longer a world player. 

They're wrong.

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Tempted as I am to stop there, I'm never-the-less going to go on to give a defense of Britain. We should be proud to be British, and we should be proud of British power in the world. While we may not be a match for the United States or China anymore we are still a titan amongst the nation's of the world. At our command is the power to end in the world in nuclear fire, to end world hunger and poverty, to reach the distant stars. That we make poor use of that power is an undeniable fact, but its time we took a stand against the rot that is making people doubt that we ever had it.

As a bit of context there are 206 sovereign states in the world.

So compared to these 205 competitors, where does Britain stand?

Economics

Britain is/has;

The seventh largest economy in the world by nominal GDP.

The eight-largest by purchasing power parity (i.e. accounting for costs)

A member of the G7, G8 and G20 (all three of the 'big economy' clubs).

London is the (joint) centre of the global finance industry, and the city with the largest GDP in Europe.

Britain contributes the third highest number of scientific papers of any country in the world.

Four of the world's top 10 universities.

Politics

Britain is;

One of only five permanent members of the UN Security Council, and has been since it's inception in 1946.

Arguably 'first amongst equals' of the British Commonwealth, which includes 54 countries.

A member of the Council of Europe and the Council of the European Union (in which we have the joint largest number of votes).

Has a seat on the WTO (left vacant now due to the EU minister taking all decisions for Europe)

Military

Britain is/has

The fourth largest defense budget in the world

Second biggest contributor to NATO (in £s)

One of only nine nuclear armed states

A slightly suspect rating of the "5th" highest firepower in the world from the firmly tongue-in-cheek Global Firepower . com


I could probably drag this list on ad infinitum, but I think the point has been made. On the whole Britain is not a two bit player with an over-inflated ego, we are consistently in the top 5% of nation's in the world using just about any measure you want.

Is also bears point out that the two super-powers of today are conglomerates. Both the US and China's gigantic economics and militaries are based of them being a collection of what, in Europe, would be separate nations.  The relationship between the US and Europe comes far more into focus if you consider Europe as a whole, or individual states against individual European countries.

(Just to put that in perspective the European economy is 13% larger then the US economy, despite the current crippling economic problems).

There may come a time when Britain's role in the world has faded, there may be a time when the Old World finally is forgotten by the New and the Developing one. But it's not here yet. and its time people start remembering that.

/Z

The Truth Will Make Thee Fret

So the Leveson enquiry has finally come to an end; after millions of pounds, thousands of hours, and probably a small forest's worth of reports, drafts, re-writes and commentaries, the Right Honourable Lord Justice Leveson has delivered a two thousand page report in four volumes, which, if a glance of the executive summary is to be believed, ultimately boils down to "the press shouldn't do bad things." 

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I feel I should start this by actually offering a (rare) defence of the Leveson Inquiry. It was probably an impossible task to deliver a report that would achieve anything noteworthy. The problems with British press practices are so systemic, so widespread, so completely beyond the reasonable mandate of a government that has to pretend to be democratic, that there was unlikely anything Leveson could do except make the recommendations he did, and then smudge the whole thing over with fifteen hundred pages of waffle and committee minutiae.

The tradition of the Free Press is long and (in parts) even heroic. Since 1695 the British press has been free to print more or less what it wanted without government interference. The idea was at heart a simple one - if the great and mighty did stupid things that risked the welfare of the nation, the Press would find out, print stories about it, and the masses would rise up in rebellion against the incompetent overlords threatening the country.

Unfortunately the people of today don't really want information about the political and economic events of the present time, they want to know about celebrity gossip, TV shows, and who various pop stars are doing drugs with. The Leveson Inquiry was set up because a murdered teenager's phone was hacked. At root there was only one reason that happened - it sold papers. The blame for that lies solely at the feet of every single person who ever bought a copy of a newspaper that touts sensationalist or 'shock' news. Just as every country gets the government it deserves, so to does every country get the press it deserves. Ours hacks phones and prints topless pictures of our future queen. The logical inference about our population is not difficult.

Even if we do accept that the blame for this issue lies with the public, not with the Press, what about the recommendations themselves?

Politicians, the press themselves, various lobbying groups, have more or less split into two camps. One group is standing by the idea of a Free Press. They want to see a new, independent, regulatory body to oversee the industry, possibly backed up by statute in a similar way to the FSA. The main argument is that while the Press has done some bad things, other investigations, like those in to MPs expenses and the Hillsborough disaster, have brought to light cover ups and abuses which would otherwise have remained hidden.

The opposing group claim that anything short of full scale legal regulation is bowing to the pressure of the press barons, and a heartless abandonment of the victims of phone hacking or other press intrusion.

Those backing the second option, of full on state legislation, seem to be living in fairy-cuckoo land (or probably more precisely are riding the wave of interest in this subject for personal and politic gain). Here are a few points to consider;

1.) Legislation is supposedly meant to transfer some of the decision making power in the media from the journalists to politicians - however, a recent poll has shown that politicians are jointly the most dis-trusted group of people in the country - the other? Journalists. Transferring power to government only makes sense if you think the government is trustworthy. People don't.

2.) Many of the actions that have been deplored in recent months (phone hacking, intercepting emails etc.) are already illegal. Punishing those responsible is now a matter for the court system. If victims, or lobby groups feel let down they should be chasing the legal system not the press.

3.) What does state regulation even mean? Is there some suggestion that a newspaper would have to run its stories through some kind of government watchdog before publication? Is that not the definition of censorship? How can this be expected to achieve anything except a media completely controlled by the government?

4.)  If a more 'softly softly' approach is taken, with regulation defining what can, or can't, be published, how will this be administered? Again who is to determine what a valid news story is and what is just gossip? If people want to buy gossip what right has an elected government got to ban that?

5.) The Leveson Inquiry more or less blanks the issue of the internet. UK legislation would only have the force to cover articles published in the UK. With an increasing share of news reporting taking place online what good would regulation do anyway?

6.) The expansion of regulation has seen Health and Safety become a by-word for bureaucratic meddling, has seen hundreds of thousands of speed cameras sprout across the countryside, without an obvious benefit, has led to drug safety administration that takes over a decade to sanction new medicines. Why, exactly, do people thing more regulation is going to solve things in the media?

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Anyone still unconvinced by the whole issue, I suggest they read to the Discworld novel "The Truth." After setting up the city's first newspaper, aspiring editor William de Worde finds himself being out-sold by a rival publication that leads with the headline "Man stolen by Dog."

Also, next time you meet someone calling for the Leveson recommendations to be implemented in full, ask them what recommendation  51 (b) is.

On the off chance they know the answer (That sections 44 to 46 of the Data Protection Act 1998, with special application to journalism is repealed), ask them what section 44 of the Data Protection Act actually means.

/Z

Not Everyone's A Winner

Poker is a great game. At its finest poker combines skill, aggression, determination, psychology, maths, luck, strategy and theatrics, at its worst its a boring, tedious, uphill slog against an endless stream of morons with unbeatable hands, all the while watching your stack dwindling. But the one thing that all poker games, and poker players, have in common is that not everyone wins. Poker is openly, notoriously, brillantly unfair. An old adage runs that over the long run only about 20% of players ever break even, while an even smaller fraction actually make significant winnings. The other 80% lose (all) their money to fund the winner's prizes, and the huge infrastructure costs that go into running and maintaining the poker world.

It's time something gets said that I, and I think many people, have known for a long time, but which society doesn't like being shouted too loudly... Life is like poker. Not everyone wins.

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It's not particularly difficult to look at the social strata and decide who are the clear winners, and who are the clear losers. At the top end are the attractive, intelligent, confident, 'old money' aristocrats who have the personal ability and the funding to do just about whatever they want. At the bottom are the personally brillant but struggling low-middle classers who scrimped and saved, worked 80 hour weeks, never took a hand out, and then got crushed into welfare dependancy by whatever crisis has recently reared up (Financial catastrophes, wars, plagues and revolutions all have the habit of destroying people's livelihoods).

Where the world of today has changed is a shift in personal, and national, consciousness. We (romanticised, national "we") used to be a people who dreamed of shifting up the social scale. Whether its Great Expectations, the folk songs about common soldiers becoming generals, or a thousand tales of 'self made men' the idea was consistent - you started off lower down the scale and dragged, kicked and fought your way up into the 'winners' bracker. Just like poker, you might be languishing down 2,432nd place now, but ability, courage and a little luck later, might just see you jump up into the 'them that get's paid' bracket.

But we don't want to do this anymore. As I've discussed elsewhere 'progressive' taxes, welfare dependancy, the 'prizes for all' education system, and a raft of anti-success legislation and social commentary is consipiring to bring about the end of 'winners' and 'losers'. The message now one of the grand tennants of 'happy liberalism: "Everyone is equal."  It doesn't matter whether you work hard at school or just bully the kids who do, it doesn't matter if you find a job or live on welfare, it doesn't matter whether you plan you finances or just have kids and then look for a handout. It doesn't matter whether you obey the law or break it. Everyone is equal, and therefore everyone must end up with the same outcome, regardless of the choices they make.

As I learned from my Economic History lecture you should always include some statistics. So here is my statistical analysis of this issue, as usual crouched in terms of national spending. This time round I'm looking at whether people are net contributors to the state or not. What this means is do people put more in in tax, then they get back in benefits (both directly like child tax credits, and indirectly like education and the NHS).

So here are the numbers;

 (A "quintile" is a 20% segement of the population).

You can draw all kinds of conclusions from these numbers (and you can poke all kinds of wholes in them with context and comparisons - though if your that bothered I suggest reading the paper this was drawn from, published by the Centre for Policy Studies).

A few of the things that jumped out at me however,

1.) Without tax driven re-distribution the gap between the top and lowest earners is approximately 16x. (I.e. a top earner earns 16 times more then a low earner). After redistribution the difference is only 4x.

Conclusion: Whether you think this is good or bad depends on various things. Egalitarians would say its a good thing, but more needs to be done. Socialists would probably also say it was positive, but again more needed to be done. I would suggest looking at this from a different viewpoint. The national minium wage for 21 year old is £6.19 an hour, thus to earn £5,089 you would have to work 15 hours a week. Allowing a bit for National Insurance and what-not, this is the equivalent of a service industry part time job. Whether its stacking shelves, pulling pints, or mopping floors, you should be able to clear £5,000 a year without qualifications, experience, ability or effort. At the reverse end of the scale to earn £80,000 (a brief Google search suggests) requires being a senior manager or 'professional' (lawyer, accountants, doctor and so on). All of these roles require extensive academic backgrounds, long hours, some basic underlying ability, and yet when the chips fall, your only four times better off then the guy stacking shelves in Tesco.

2.) Only 40% of people actually pay into the system

Conclusions: This is something most people don't actually realise. Most people are not net contributors to the system. There is some wiggle room here (for example on an income basis I'm somewhere in the middle of patch, but since I don't have kids, don't use the NHS, didn't get support in paying for my studies, don't claim any allowances or benefits, I get back a lot less then the 'average' household. Likewise I'm sure there are households on £50,000 a year who are still net beneficaries because they have four children in state funded education, someone in long term NHS-funded care, and so on). A cynical person might suggest that since a political majority of 60% would give a political party an overwhelming advantage it is in the interests of the ruling class to ensure that 60% of people benefit from the system, thereby supporting it, I'm not discussing this here but its an interesting point.

Again however the question becomes, why are the minority supporting the majority? The idea behind insurance, or collectives, or virtually any other group activity, is that risk or hardship can be spread across the group and thereby reduce it to the level where each member only carries a tiny part of the burden. In our system though the whole burden falls on the shoulders of only 2 in 5 people, the others are, literally, getting free money every year for doing nothing.

3.) The top 20% earn almost exactly 50% of the income (before re-distribution), but pay almost 80% of the effective taxation.

Conclusion: There is an argument that comes up on a fairly regular basis to do with who pays how much tax. The argument runs that the top 10% pay just over 50% of all tax, and therefore the system is unfair. A reasonable rebuttal to this is that if the top 10% also earn more then 50% of all the income then its still a fair system.

The above figures however let us re-jig the numbers to look at 'net' taxation rather then gross taxation. What we find now is that it is only the top percentiles that actually pay tax at all. 100% of effective tax is paid by people in the top 40%, and 80% of all effective tax is paid by the top 20%.

4.) For 40% of the population state support makes up half, or more, of their total household income.

Conclusion: The 'client' state is here. For over 20 million people in the UK, hand outs from the government have a bigger effect on their standard of living over than their actually jobs. If this isn't the end of 'work to succeed' than I struggle to think what would be.

..

Poker games without real risk don't work. People do stupid things, make 'wrong' decisions, and generally mess the game up for everyone else, but who loses? It's not the people who were going to lose to the good players (after all their money was gone the minute they sat down in a game they couldn't win), its the good players themselves. Much of nuiance in poker is destroyed when your playing against someone who just doesn't care. All the long hours spent studying theory, grinding out thousands of hands, considering betting patterns, its all pointless. As a friend of mine once said "If they don't know what they're doing, how are we meant to?"  Every government handout, in any shape or form, does the same to life. Life without risk doesn't hurt the people who would have got themselves crushed anyway, it hurts the strong people who make good decisions, only to have then be swamped in a morass of poor-choice junkies we're expected to support.

/Z