UK vs EU, let’s look at the numbers

Brexit negotiations are about to begin. Certain voices inside the  EU Commission are advocating adoption of a hard line against the UK. Specifically re: future trading arrangement.

Couple of things need to be taken into account when negotiating positions are analyzed:

i) GBP vs Euro exchange rate
Screen Shot 2017-03-19 at 12.17.53 PM

GBP is down 17% vs Euro since January 2016.

ii) Big Mac Index – implied currency valuation

Big Mac

Euro is approximately 10% overvalued

iii) Inter EU largest trading partners

UK is either second or third largest export market for: Denmark, Germany, Ireland, Spain, Italy, Cyprus, Malta, the Netherlands, Poland, Sweden – that’s roughly a third of the EU.

iv) UK trade balance of goods with the EU

UK trade w EU

UK is a net importer of goods from the EU.

v) WTO tariffs for major UK exports to the EU

WTO tariffs.png

Assuming that should there be a “hard” Brexit, tariffs would revert to WTO levels.

What do these numbers tell us?

In January Theresa May said:”I am equally clear that no deal is better than a bad deal”. Is she right? If we look at the figures above then it would look like she is right. In case of “hard” Brexit, it is logical to assume that WTO rules would govern trading relationship between the UK and the EU. If we look at import duties across the major UK exports, we can see that general rates are much lower than the implied over-valuation of Euro vs GBP. All this means that UK’s competitive position at current exchange rates would not be eroded if there is no deal and WTO level tariffs are applied against UK exports to the EU.

EU’s leverage over the UK is limited, unless EU decides to go nuclear and unilaterally increases customs duties above WTO levels. How likely is that the EU will take a hard line? If the decision is left to EU Commission in Brussels, then it should be expected that hard line will be taken. EU Commission is currently demanding that UK should agree to pay some 60 billion euros as part of its exit bill, and that is before any negotiations even start! Seems like a huge arbitrary sum of money that has very little chance of getting paid, for starters it is very unclear which court would even have jurisdiction over such a demand. This demand in itself could stall the negotiations with WTO rules automatically becoming a de-facto new trading standard after 2 year negotiations period has expired. If WTO tariffs become the standard, UK would end up with a pretty good deal, while EU’s exporters to the UK would be hurt.

More likely scenario is for the EU Commission to feel pressured by the EU exporters to make an economic deal that will maintain EU’s access to the UK’s market at preferential rates, especially in a weak GBP environment. When we analyze where will the political pressure come from – Germany, Denmark, Italy, Spain, Sweden – it is reasonable to expect that EU Commission will give in to the pressure. Commission’s interest and national interests do not align if we assume that Commission will want to make a political statement while national governments will have to live with the economic consequences of such political statement, possibly a gamble too risky for national governments to take.

Overall, UK’s position going into the negotiations is pretty solid, that position only looks better if free trade deal with US is a possibility. This analysis begs the question:”Who is next?”

 

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Legalna Korupcija

Afera Sanader/Mol/Upravljacka prava – drzavno tuziteljstvo tvrdi da je Sanader primio mito od oko 5 milijona eura.

5 milijona eura je jako puno novaca, vise nego sto ce zaraditi 99% svjetskoga stanovnistva. Ali ti je jako mala svota kada se gleda legalna korupcija u Hrvatskoj.

Javni biljeznici, stanice za tehnicke preglede, dimnjacari, apoteke, itd. sve su struke koje su striktno regulirane zakonom. Zakonom koji dodjeljuje monopol – sto u pravilu znaci ekstra-profit. Donesni zakoni donese ogromne beneficije nekim pojedincima. Osim sto je broj i cijena usluga javnih biljeznika regulirana zakonom, interesantno je da javni biljeznici nisu obveznici javne objave svojih financijskih rezultata dok sve ostale tvrtke jesu. Glavni razlog toga je da javnost nemoze doci do spoznaje koliko biljeznici zaradjuju.

Ekstra-profit je postala fraza koja se stalno koristi, uglavnom ta fraza se koristi da bi se napadali poduzetnici koji zele narusiti sadasnje stanje monopola. Ekstra-profit kao koncept znaci da netko zaradjuje vise nego sto treba, u vecini slucajeva ako je trziste otvoreno, ekstra-profit ne postoji. Ako je neka djelatnost jako profitabilna moze se zakljiciti da ce na trziste uci drugi igraci i smanjiti profitabilinost. Ako drzava napise propise koji koce ulazak na trziste onda je moguce da se situacija ekstra-profita odrzi, jos vise ako jos na sve to drzava regulira cijene na relativno visokom nivou. Uzmimo naprimjer podatke koje mozemo naci za 10 najvecih javnih biljeznika i 10 najvecih odvjetnickih ureda – profitna marza javnih biljeznika je duplo veca od odvjetnickih. To je cisti ekstra-profit koji je omogucen pojedincima.

Ovakav pristup regulaciji dovodi do problema “anti-poduzetnicke klime”. Uspijeh se vrlo sumnjicavo gleda, zato jer se uspijeh u pravilu povezuje sa nekom vrstom politickog ustupka, dakle uspio si zato jer ti je netko nesto sredio. Slicno kada firme ne-uspijevaju, onda se njihov neuspijeh isto povezuje sa politikom – da mi je drzava dala ja bih uspio. Cinjenica je da vecina malih firmi nece uspijeti, samo jedan mali broj firmi ce se odrzati na zivotu, dok ce samo jedna mala skupina napraviti neki znacajniji uspijeh. To nema veze sa politikom – Facebook nije uspijesan zato jer je americki predsjednik odlucio da Facebook mora biti uspijesan. Facebook je uspijesan zato jer ima super produkt koji ljudi zele, sto ne znaci da se jednog dana na trzistu nece naci neka nova platforma koja bi mogla zamjeniti Facebook.

Ako hocemo promjeniti “anti-poduzetnicku klimu”, onda nije dovoljno samo gledati da se smanjenje procedura i poreza, bitno je i mjenjati percepciju poduzetnistva. Percepcija se mijenja tako da se svima omoguci isti pristup trzistu – da se ukinu monoploni zakoni koji reguliraju odredjena zanimanja. Osim sto bi ukidanje monopola dovelo do smanjenja troskova poslovanja, otvaranja novih radnih mjesta, dovelo bi do toga da se uspijeh konacno pocne gledati kao uspijeh sposobnog pojedinca, a ne kao politicki ustupak vezama i poznastvima.

Obamacare’s Sustainability by the Numbers

Democrats point to reduction in uninsured as an example of Obamacare working. Conservatives point to premium hikes as an example of law not working. Obamacare analysis are usually full of cherry picked numbers. It is very easy to prove by cherry picking that the law is great or that it is horrible. It just depends on your opinion of the law and statistics used. Rather then going into an ideological debate, I wanted to see if the law is financially sustainable from a financial incentive perspective. This is important as law mandates that prior condition is not a reason for refusal of coverage or premium hike – basically I can crash my car and then buy insurance and ask the insurer to pay to have my car fixed. This type of problem is also known as the moral hazard. For the moral hazard to be avoided costs for not having insurance would have to be higher then if a person was insured.

First thing to look at are the deductibles, basically what you would pay out of pocket before insurance kicks in. For a low-end bronze plan average deductible for an individual is around $6,000.

Second is actual penalty that individual has to pay if there is no continuous coverage. Law states that for an individual the penalty is the greater of $695 or 2.5% of annual income.

Third is cost of plans – annual average cost of a low end bronze plan is around $3,700 for a 30 year old.

So does it make sense to game the system? Pay the penalty and then get insurance once unthinkable happens, that is the question that basically answers the question of sustainability of the law. If penalties are higher than insurance cost then the law is sustainable, if not then the law is a disaster waiting to happen.

For a 30-34 year old, average income is around $35,000.

Subsidies are only available if income is below 250% of federal poverty level, which is around $30,000. Our average 30 -34 year old is above the level of poverty and gets no subsidy.

Applying the penalty at 2.5% of income means that individuals without health insurance will owe $875 to the IRS. This is much less than $3,700 for the bronze healthcare plan.

Simple conclusion here is that if you are an average 30 – 34 year old, it doesn’t make sense to have health insurance.

But what if you are not an average earner, how much would you have to earn to be at a breakeven point of not having the coverage?

This is the number that is never really analyzed. Math is pretty simple 2.5% of income would have to equal all out of pocket expenses (yearly premium + deductible). To figure out out of pocket expenses we need to compare total annual premiums and deductibles for each of the plans: platinum ($7,000); gold ($6,700); silver ($7,900); and bronze ($9,700). Total out of pocket expenses are lowest for a gold plan and a rational player looking to game the system would chose gold plan should serious medical condition develop. That’s the out of pocket cost to the employee, however there’s a employer side that needs to be taken into account as well.

The law states that employers with over 50 employees need to provide affordable healthcare insurance to their employees with minimum coverage. Affordable means that the cost to the employee of healthcare premium must cost less than 9.56% of their annual income, affordability is met if cost to the employee is less than $3,300. Minimum coverage means employers need to offer bronze plans or better. It is rational to assume that employers seeking to keep the costs down would opt for cheapest bronze plans. Since most insurance companies require employers to cover at least 50% of the cost of the premium; actual out of pocket premium cost for our 30-34 year old would be half of $3,700 or $1,850; maximum out of pocket (premium + deductible) cost would be $6,850. But should something happen rational person would opt for gold plan and with max out of pocket expenses of $6,700. This gold plan would be better choice than having company sponsored and subsidized bronze plan.

Therefore we can determine that breakeven point for having insurance is when individual penalty is at least $6,700. Annual income required for the current penalty to be breakeven is around $270,000. Average income for the top 1% of the earners in the 30-34 age group is $185,000.

But what about other age groups? It actually gets worse. Healthcare premiums increase with age, while deductible stays the same. But even if we assume that premiums stayed the same, how many people would chose to get healthcare because of financial incentives?According to Census Bureau only 2.4 million people make more than $250,000. This would mean that the for everyone, but for a very small minority (less than 1% of all income earners), it doesn’t make financial sense to have healthcare insurance .

So no, the law is not financially stainable since rational players will want to LEGALLY game the system.