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"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice" - Adam Smith

The govt is finally catching up with the ASI

Written by Miles Saltiel | Saturday 26 October 2013

A second day for the ASI to celebrate. It may have taken HMG four years to catch up with our policy on a bad bank, but it took just six months for our arguments on green taxes to win through. In April’s blog, “An end to Zombie politics”, we called for the government to “suspend surcharges on energy bills [and] subsidies to energy suppliers or technologies”. Yesterday Cameron told the House of Commons that he is doing just that. There has been a certain amount of backing and filling since, with today’s Times suggesting that the Government may pick up costs no longer funded from energy bills. This sort of robbing Peter to pay Paul misses the point. The most recent IPCC report altogether rejects the alarmism formerly propelling green policy. In addition, reviews of the climate change literature point to the benign effect for the next fifty years of such warming as may occur. To use the slogan of climate change campaigners, “the science is settled”, that is settled against the expensive green policies which the government seems set to abandon.

And while in self-congratulatory mood, let’s note that our call for an acceleration of shale exploration was endorsed overnight by the National Trust, also reinforced by the agony of the Grangemouth complex, unable to compete with cheap American feedstock.

Whatever next? Let’s set up our scorecard on the policies we were calling for earlier in the year.

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Bad bank

Written by Miles Saltiel | Tuesday 22 October 2013

Let us join with the evangelist’s celebration of heaven’s joy at the sinner who repenteth. Even since the financial crisis kicked in, we’ve been banging on about the government’s approach to banking regulation, variously irrelevant as the bonkers Vickers proposals, self-contradictory as schemes simultaneously to recapitalise and to promote lending (help to buy, anyone?), and generally panic-stricken throughout.

Four years ago we argued for “the formation of a bad bank and subsequent work-out, which often proves profitable”. Well at last George Osborne has got the email, a few days ago telling reporters in China that he’s asked Rothschilds to make proposals. This would pave the way for RBS to be floated, with a sale of Lloyds signalled for the off following Royal Mail and the Government’s belated rediscovery of the feel-good properties of privatisations.

The most successful example of bad banking came after the Swedish banking bubble of the early nineties. Duff assets were transferred to a couple of asset management companies which in due course sold them off, often at a profit. The Swiss took a similar approach in 2009, as did the NY Fed which created “Maiden Lane” to take over assets from Lehmans and AIG. Indeed we already have something of a bad bank in “UK Asset Resolution”, which recently sold its portfolio of Northern Rock’s dodgy loans to an American consortium including debt recovery specialists.

So why so long to apply this tried and tested approach to RBS? Maybe it’s scale: the egregious Fred Goodwin was celebrated for his commitment to buying the worst business at the top of the market. Maybe it’s politics: the rediscovered merits of privatisations mentioned above, or the prospect of the Scottish independence referendum next September. In which case, why did Osborne rule out selling a stake in RBS this side of the UK’s general election in 2015? We couldn’t say, other than to note that once sinners take up this repenting habit, it becomes far easier for them to change their minds about other errors.

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America's shutdown to a Briton's eyes

Written by Miles Saltiel | Saturday 12 October 2013

What to make of the Yanks and their budget? As Newt Gingrich pointed out in last Saturday’s FT, we might start by dialling down the hysteria: shutdowns are no novelty.

“Democratic Speaker, Tip O’Neill presided over twelve…government shutdowns…with presidents Jimmy Carter and Ronald Reagan, and even while Democrats controlled both Houses of Congress….No one in the O’Neill era saw shutdowns as catastrophic. They were irritating, complicated and frustrating but also part of the legislative process.”

The GOP is fussed about Obamacare, which no-one in the UK gets. Its main point is not to provide hospital care for indigents (something already provided under Medicaid and common-carrier obligations), but to oblige healthy youngsters to sign up so as to reduce costs by bringing them into the insurance pool. This makes some sense – it more or less happens elsewhere - but putting it like this explains why Americans see it as intrusive and the scheme is so unpopular.

More generally, the Tea Party is up in arms because the new obligations of Obamacare come at a time when the US (as pretty much universally) is testing the limits of what a government of free citizens can afford to take on. Hysteria is now extending to lefty commentators, who are calling apocalypse if the debt ceiling is not raised on 17 October, fearing without quite admitting it that the markets will bear down on the President. They have been joined by some big bondholders who ought to know. Now we hear that “constructive talks” are under way - on the ceiling at least. But recall that great changes in national direction only come with grubbiness and mess: think of Lloyd George threatening to pack the Lords after they turned down the Peoples’ Budget, Roosevelt menacing the Supreme Court over the New Deal, or Bevan getting the NHS past hold-out doctors by “stopping their mouths with gold”. That’s politics.

But is Obamacare a good thing? Hard for a Brit to say. US healthcare is costly by our standards, yielding outcomes which at their best are world-beating but not universal. Maybe they need more private “managed care” systems to reduce costs, but that is not the same as Federal intervention.

Back to the limits of government. King Charles I - the one who lost his head - had a legitimate gripe about the irresponsibility of his parliaments. They were bloody-minded, sent mixed signals (singe Papist beards; raise no new taxes) and generally messed him about something rotten (not to mention that losing the head thing). But they and their successors established the principle that the executive shall be controlled by the power of the purse, exercised by representatives of the taxpayers. The Tea Party is also bloody-minded and given to mixed signals. But it is fully seized of that most essential component of American DNA, snappily put by the Culpeper Minutemen, “Don’t tread on me!”

No doubt, the immediate outcome of this month’s stand-off will be the customary fudge. That’s politics too. But make no mistake: the Republicans in their confusion, the Tea Party zealots in their flyover-state gaucherie are onto something: where shall government find its limit? It’s not a trivial question and it won’t be answered in just one go.

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A better way for hospital care II

Written by Miles Saltiel | Sunday 09 June 2013

Two years ago, the ASI’s No Need to Flinch set out a raft of proposals to shake up the NHS’ demand side. We called on the NHS to treat people as individuals with less heavily aggregated risk pools, we called for funding options to be widened, and we made the case for allowing co-payment on procedures the National Institute for Clinical Excellence would not otherwise fund.

Under this system most would be obliged to purchase insurance—like the car insurance regime in the UK—while end of life care and accident and emergency would be paid for by the state, as determined by a political consensus. The issue then becomes reform on the supply side—hospitals.

Governments have grappled with this for generations, giving rise to perennial complaints about “NHS reorganisation”. In fact, hospital doctors always see the civil servants off: they’re the smartest guys in the room, furnished with the best data and ruthless in exploiting the fear-factor. But the public would be best served if the components of secondary care were broken up to embrace a variety of approaches, so that best-practice emerged continuously from what Tim Worstall’s recent blog post called “market processes …an endless repetition of experimentation”.

This would include all secondary care: ambulances, labs, specialist clinics. Most of all hospitals, although it is often argued that full service calls for concentrating the required skills in big operations. There is something in this, but not so much as to render integrated hospitals beyond competition. In the first place the argument misses the mark. Even now, we accept some specialities in regional if not national settings. Meanwhile national guidelines impair the experimentation which makes for progress. More to the point, even the largest hospital is susceptible to competition. This is because even small reductions in demand threaten the specialist functions which justify its existence.

Disposals also promise relief to the Chancellor. ASI’s 2010 study of the UK’s intergenerational obligations, On Borrowed Time, showed Britain’s secondary healthcare to be worth around £200bn. Considering corporation tax reductions and market increases since then, it could now be worth £300bn.

Let’s recast integrated outfits to maximise choice for scheduled activities where patients have discretion. Let’s also contemplate several business models: overseas groups, newly-listed companies, professional co-operatives and charities or universities. And finally, let’s set aside a fraction of receipts for practitioners, following Bevan with the consultants when he “stuffed their mouths with gold” to win them over to the NHS. So the Exchequer might only get half the headline sum. That would be £150bn, not quite fifteen percent of the national debt, but well worth having.

Best of all, if hospitals failed to attract referrals from GPs, already at arms-length, even the largest would shortly find their specialist functions at risk: market discipline would enforce reform, something beyond seventy years of NHS control. So let's free up the rigid UK healthcare system and inject some innovation, competition and diversity in.

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A better way for hospital care I

Written by Miles Saltiel | Saturday 08 June 2013

Relieving the State of a hospital sector it has never been able to control would raise standards and reduce Britain’s national debt by close to fifteen percent.

In the private sector, if outfits fail they are reorganised, we call this bankruptcy. In the public sector, if outfits fail they are supported with our taxes—heaven knows what to call this—solidarity? compassion? How about hokum?

Yes, they keep us alive; yes, they’re free at the point of use; but let’s get real. NHS hospitals are unwholesome—hospital infections are now an NHS commonplace. They're unfriendly—try getting a diagnosis from a consultant whizzing through ward rounds. And they're inharmonious—listen to front-liners talking about clinicians, consultants about GPs, or any of them about porters. Such ill-feeling leads at best to bloody-mindedness, at worst to irregularities like the mid-Staffordshire deaths or newly-disclosed lapses in late-week aftercare.

And the keeping alive thing isn’t going so well: two years ago, the ASI’s No Need to Flinch presented data showing that the NHS is undistinguished by comparison to its peers. It is certainly free at the point of use, but that’s one of the problems: without pricing we have centralised rationing, priorities set by bureaucrats using clinical pretexts for essentially arbitrary decisions.

The NHS has become an ethical dump. Ordinary people are assumed to be unable to make their own decisions. They face policies which second-guess their choices, ration healthcare surreptitiously, allocate provision according to the state of public finances, and deprive patients of treatments in a public setting if they want to fund them directly.

As to economics, for as long as healthcare is unpriced, it is subject to infinite wants, especially as populations age and new technologies emerge for diagnosis, treatment and bodily modification. Prices would help patients make informed choices, as in the private sector.

Looking at practicalities, as ever in public supply the producers have captured the system, running it for their own purposes. Doctors, nurses, radiographers and pharmacists collaborate reluctantly in an ill-tempered armistice covered by paperwork in triplicate. Compare private healthcare, where professionals co-operate promptly. This is because customers with choices ensure that private healthcare competes to meet their needs. By contrast the NHS monopoly prevents customers going elsewhere; instead the Department of Health creates tick-lists, demoralising practitioners who game them. The NHS needs the discipline and coordinating force of the price system.

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An end to zombie politics 6: Broadcasting

Written by Miles Saltiel | Friday 17 May 2013

The government needs revenues and holds too many assets on its books. In future blogs, I will return to its holdings in finance and healthcare. For the time being, let’s look at its involvement in media, specifically broadcasting.

Is it so very wrong to confess that the BBC has been getting on my nerves since the era of the “Boat that Rocked”? Indeed, contrary to Richard Curtis’ fairy-tale, it was no bewhiskered Tory, but the sainted Beeb which connived with the Musician’s Union and that old crook Harold Wilson to suppress the pirate radio stations, replacing them with the anodyne Radio 1.

The rationale for the BBC arose when spectrum was scarce—or more accurately monopolised by the military. But this hasn’t been the case for a generation. The public service obligation is unnecessary now that bandwidth is de facto unlimited – after all, the UK doesn’t have it for the press (despite the impact of Leveson). So why carry on with a poll tax on every household for a frankly undistinguished broadcasting service? Admittedly it keeps the chattering classes quiet-ish but at the price of giving them a platform and exposing the rest of us to decades of second-rate programming. Meanwhile its news values distort national debate, though to be fair the tendency of a profession to look at things from its own perspective means journalists are bound to (and should) be inclined to have at the powers-that-be, which today could engender a left-ish perspective.

Regardless, the BBC can readily be broken up into its constituent parts: entertainment, catalogue and commercial, content generation, news, radio, minorities, regional and so on. My figures show it would raise some £5.4bn, if sold in the market, or (where there is no market value) disposed of to other bodies like charities, universities and other NGOs, as well as local authorities. I estimate that Channel Four is worth another £1.6bn for a total of £7bn. Better than a kick in the teeth, and letting the public off the cost of the TV licence, so liberating the estimated 4,500 civil servants concerned for more gainful employment.

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An end to zombie politics 5: Europe

Written by Miles Saltiel | Thursday 09 May 2013

How readily the Zombie metaphor applies to the politics of Europe: eighteen years of unapproved accounts, eternal squabbles between federalists and anti-federalists; the Euro project itself - intended to unify but achieving the opposite. But none of this matters for this piece, confined to the Zombie character of British responses to the European dream and the nightmare it has become. Instead, I will explain why the government must not ruin its negotiating stance by essentially promising to put its weight behind staying in the EU regardless of the success of negotiations, as I laid out in greater detail in a recent report.

UKIP’s success last Thursday (2 May) and Lord Lawson’s piece in Tuesday's Times (7 May) blow the cobwebs off an issue kicked into touch for three months by January’s  referendum promise. Lawson's article points out that referenda can sometimes be red herrings. Sometimes, as in 1975, they are a device to shut down discussion. On this occasion they could be more of the same. Alternatively they can act as a way for the political class to reconcile themselves to giving up on a favourite project. I’m getting that the current government warms more to the former approach: thus the bonkers ideas floated over the past week.

On the one hand they've considered doing absolutely nothing. This would look magisterial, if an administration bumping along the bottom of the electoral cycle could pull the stunt off; however in the event it will look weak.

On the other hand policymakers have mulled publishing a bill setting out the referendum terms. This scheme would also be as weak as water, vulnerable to disabling amendment when eventually put to Parliament. Similarly, the wheeze of a 'mandate' or 'backing' referendum coinciding with the EU elections next year adds nothing to January’s promise. Both of these are transparent tactics, most likely to irritate voters who deserve to be taken more seriously.

Worst of all is their inherently zombie nature in flinching from the contradictions inherent in the so-called in-out referendum. These stem from the convention that Her Majesty's Government commits itself ex ante to campaign for the renegotiated outcome. It may be that anything less would court accusations of unsportsmanlike behaviour from the other side - our negotiating counterparties in Europe. Such a commitment, however, greatly weakens the UK’s bargaining hand, particularly if following the current plan of linking to a timetable. The other side can simply wait out our negotiators, offer meaningless concessions, or prevail upon the UK to offer further referenda till the electorate sees sense and votes in the EU's preferred direction, as seen previously in France, Ireland and elsewhere – if it is a given that the government will put its weight behind an in vote regardless of the result.

If the government wishes to offer a referendum in good faith, let it put forward a proposal which actually makes sense. It may not get through Parliament, but it will show willing and serve as a clear line in the sand. This would be a bill to bind UK to one and only one referendum regardless of the state of negotiations at the time of a stated deadline. Setting aside party politics, if such a bill were passed it would be more likely than not to strengthen UK negotiators’ hands; it could pave the way for early negotiations if wanted; and it would relieve the post-2015 election government of the nutty ex ante obligation to campaign in favour of the outcome.

The arguments against are trifling: of course it might not get through parliament (and if it did would not bind a future Parliament), but the very attempt sets the agenda both domestically and overseas, going some way to throwing holy water on the zombie hordes of EU politics.

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An end to zombie politics 4: Land use

Written by Miles Saltiel | Friday 03 May 2013

Zombie policies on land use are no Aunt Sally: credit conditions come and go, but planning delay (or unavailability) is a project-killer from cycle to cycle. In October 1998, the McInsey report, Driving productivity, identified UK land-use restrictions as one of the critical impediments to productivity growth. This was never contested but neither was it acted upon. In October 2012 Lord Heseltine’s report, No stone unturned, pressed for “…inject[ing] urgency and purpose into the planning system”. On 17 March 2013, the Treasury responded that HMG is committed to “reforming the planning system to reduce costs and bring speed and certainty to business; and to addressing under-investment in the UK’s infrastructure while providing investment opportunities to the private sector.“

All well and good, but this won’t happen unless HMG deals with the underlying reasons for delays choking off the supply of land for growth. The central problem is that the benefits of change in land-use are valued less highly by locals (including local government) than loss in amenity. Another way of looking at this is that benefits are appropriated by developers, users and central government.

It’s beginning to sink in that the goodies need to be spread around if they are to be earned in the first place. In the case of fracking this is straightforward: a fraction of the incremental revenues from drilling or distribution are put the local’s way. HMG is proposing reduced energy costs; other hydrocarbon regimes appropriate revenues for public infrastructure. It’s a matter of mechanics and political judgment and HMG is already going the right way. But more should be done.

Policy for immediate relief

1. On balance I get that the local authorities need to be incentivised to go along with a more liberal planning regime, so as a matter of practical politics I’d go for pushing a bit of the gravy their way.

2. In return, let them accept more permissive guidance to planning authorities; or suspension of the objectionable clauses of the Town and Country Planning Acts.

3. This would be with a view to a holiday on restrictions in the construction of qualifying infrastructure, the definition which to be announced from time to time by the Secretary of State.

4. All this needs to be exempted from judicial review.

Policy for eventual resolution

Sharing out the spoils is more problematic where changes in land-use add value only over time or indirectly. Here let HMG add securitisation to “value capture”, that is sovereign appropriation of increased land-values when road or rail links are built.

5. Let HMG compensate owners of lands blighted by infrastructure at market rates on “most-favoured vendor” terms, with securities representing the value of the overall parcel of land, traded in the secondary market and enjoying time-limited underwriting (eg, negotiability for taxes at par).

6. Let HMG establish Enterprise Zone (EZ) reliefs for the lands concerned, attracting new development and adding to the land value and upside for the bonds.

Please see here for a worked example of such a scheme and here for a draft term-sheet for a land bond.

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An end to zombie politics 3: The regions

Written by Miles Saltiel | Friday 26 April 2013

The urgency of relief from Zombie regional policy was brought home by the street-parties celebrating the death of Baroness Thatcher, the palpable bitterness of regions eviscerated by a century of rotten policy. Originally I planned this post for financial regulation, but as recent banking failures hinge upon regional policy, let’s turn to this instead.

First, some international context: from the outset of the financial crisis, thoughtful Americans noted that subprime borrowing was stimulated by policies promoting home-ownership among uncreditworthy minorities, unreached by general prosperity. Good intentions went wrong.

And now we begin to grasp where our own good intentions went wrong. On 5 April, the Parliamentary Commission on Banking Standards called HBOS’ failure what it was: plain bad banking, nothing to do with alphabet soup, bonuses or the other usual suspects. This paves the way to face the fact that HBOS’s collapse tallies with Bradford & Bingley, Dunfermline, RBS and Northern Rock - all failed “country banks”.

Let’s pass over financial regulation till another blog, reverting to today’s theme: that the decline of Britain’s primary industry prompted 100 years of awful policy extending from white-elephant investments, through piecemeal subventions, to the Blair-Brown wheeze of public-sector and financial employment, the latter not just back-offices but regionally based banks with national ambitions, political patronage, and - as it turned out - disastrous business models.

Regional regeneration is uphill sledding: Dorling and Thomas point to the UK’s profound regional disparities and the inverse relationship between public expenditure and prosperity, while Polèse captures the agony for once proud regions of accepting lower cost-bases. So let the Tories reconnect with voters outside the Southeast by repudiating Zombie policies and proclaiming two clarion objectives: immediate relief and eventual reskilling.

Policies for immediate relief: 

1. Let HMG kick off with tough love, doing its bit to make regions more competitive with regional wage differentials for its own staff. The pill’s bitterness is best sweetened by letting national inflation operate upon salary-sheets redrawn to equalise employees’ purchasing power from region to region.

2. My last blog touched on the opportunities for the North opened up by fracking. All over the world, hydrocarbon development promotes “roustabout” outfits offering drilling, wellhead and other services, all fostering local proprietary skills. So let the Department of Communities and Local Government issue guidance encouraging the construction or conversion of property for such entrepreneurs. At the same time, let the Treasury offer holidays on their national insurance and corporation tax. Finally, let the Department of Employment relieve them of the restrictions of wage and employment regulation.

3. The population is ageing and the retired no longer necessarily hard up. So let regional developers and operators of retirement communities enjoy relief similar to that set out above.

Policies for eventual reskilling: This goes to rebuilding technical, entrepreneurial and political skills. Let’s pass over general education, hoping that Michael Gove’s reforms catch hold; and local funk, often stemming from underfunding and addressed in my last blog. The last government pushed large-scale public sector and financial employment with grisly results, teaching us to field other industries and more resilient structures.

4. The Treasury plus the Education and other ministries should goose up university development offices seeking to engineer regional knowledge-based clusters, with regulatory concessions, tax holidays and other Enterprise Zones elements. Heaven knows how hard it is to pick winners, so let HMG also be promiscuous with funds for start-ups to match arms-length private money.

5. The promise of creative and healthcare industries is all too often stymied by BBC and NHS jobsworths. So preparatory to more fundamental reform, let’s decentralise programming for license-funded broadcasters outside London, pushing the consequent local content to rise to the challenge of a high bandwidth world; and let the Department of Health operate a presumption of approval when commissioning bodies in the regions propose innovations in secondary provision. And note, creative goes well beyond TV, embracing business communications, design, fashion, performance art plus social and other media/software, most of these inherently small-scale. 

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Get ready for shale

Written by Miles Saltiel | Monday 22 April 2013

The prospects for hydrocarbon production on the British mainland seem stronger than ever. On 10 April, Professor Richard Davies of Durham University's Energy Institute published a paper stating that fracking is not a significant source of detectible seismic events. Meanwhile, over the last year, there has been a series of leaks of the forthcoming report by the British Geological Survey which is to raise the UK’s estimated reserves of shale gas by some 300 times.

This is welcome news as it paves the way for a secure, domestic, low-cost solution to the thorny problem of replacing the UK’s obsolescent capacity to generate electricity, with a low-carbon footprint feedstock. Many of the deposits are in the North, which would benefit from the investment; but they are also present in the south. In order to make the most of the opportunity, new policy is in order.

HMG is trailing plans to share revenues to incentivise local authorities to welcome oil development. This is very much on the right track, though I would go further: let programs be configured to encourage local authorities to compete for funding, so that they share (say) ten percent of incremental tax receipts; and bid against each other for a further ten percent for development or remediation.

The Petroleum Act (1934) appropriated subterranean hydrocarbon rights from the land-owner to the Crown, at odds with other mineral rights. This anomaly was theoretical until now, as no substantial deposits had been discovered. In light of new technologies we need to reverse this policy which was recapitulated in the Petroleum Act (1998). The clauses concerned should be repealed so that the interests of land-owners are aligned with the public interest in low-cost energy.

This takes us to taxation. Oil prospecting is beset by a complex of penal taxes, compensating exemptions plus a history of opportunistic impositions. All of this adds to investment uncertainty. HMG should set itself to remove fiscal risk from the investment equation, by introducing a regime of simplified tax treatment for newly-lifted deposits of land-based hydrocarbons, to which it commits itself for at least the next ten years.

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