The Pin Factory Blog

I think we can all tell our little tales of why it is that government costs so much. Sometimes it's the things that are bing done: do we really actually need the Arts Council? At others, it's not what, for the things being done might be very sensible indeed, but the way they're being done that makes them so expensive. As an example, this from a one man helicopter company in the US:

Finally, the FAA inspector looked at my random drug testing program to make sure that everything was in place. I’m subject to the same drug testing requirements as United Airlines. I am the drug testing coordinator for our company, so I am responsible for scheduling drug tests and surprising employees when it is their turn to be tested. As it happens, I’m also the only “safety-sensitive employee” subject to drug testing, so basically I’m responsible for periodically surprising myself with a random drug test. As a supervisor, I need to take training so that I can recognize when an employee is on drugs. But I’m also the only employee, so really this is training so that I can figure out if I myself am on drugs. As an employee, I need to take a second training course so that I learn about all of the ways that my employer might surprise me with a random drug test and find out about drug use. But I’m also the employer so really I’m learning about how I might trap myself.

Yes, regulation of some things is indeed necessary but can we at least try, if not entirely manage, to get to the point that we've got sensible regulation being sensibly done?

For the first time, the UK’s national accounts are being drawn up on a similar basis to those for public-listed companies. Whilst the full details are due this autumn, the recently reported headline numbers are, as expected, immensely concerning.

With the standard Public Sector Net Debt (PSND) figure of a staggering c£1 trillion, the latest data has focussed on two additional elements - public sector pension liabilities and the Private Finance Initiative (PFI). In respect of the former, the liabilities figure is reported to be c£1.1 trillion. This is an enormous number which reflects the ‘It’ll be Alright on the Night’ economics that have applied for decades to public sector pension entitlements. At one time, when private sector pension provision was generous and public sector wages were often below the private sector equivalent, this disparity was more tolerable.

Nowadays, with the marked reversal of these two trends, it certainly is not. Hence, the Government should act aggressively to cut this massive liability. Increased public sector employee contributions, a higher retirement age qualification and reduced retirement benefits should all play a part. The latest figures also highlighted the Government’s escalating PFI exposure. Compared with the pension figure, an estimated c£40 billion liability may look small beer – not so. Although PFI’s appeal has been waning of late – rightly so – efforts are needed to reduce this liability.

Whilst the UK’s PSND reflects internationally approved financing criteria – and therefore excludes both public sector pension and PFI liabilities – the markets are less forgiving. The turmoil in recent days, especially in Italian bond markets, reflects the serious damage that high debt levels can inflict. The next few years will be no time for the UK to wobble on its priority to tackle both its massive PSND and other liabilities. It may take a decade to return the UK’s public finances to equilibrium.  

An interesting little idea that I'd not come across before: the Rahn Curve. It's analogous to the Laffer Curve, in that it says there's a level of public spending up to which more increases growth rates, over which it reduces growth rates.

It shows that growth is maximized by small governments that focus on core “public goods” like rule of law and protection of property rights. But when governments expand beyond a certain growth-maximizing level (the research says about 20 percent of GDP,....), the result is slower growth and less prosperity.

It's intuitively appealing to people like us of course and as with the Laffer Curve at extremes it's clearly and obviously true. Zero tax means zero government and without at the very least some form of defense, police and a criminal justice system there's not going to be much economic growth. When the government takes and spends all of the economy there's not likely to be much either. The argument will be, as with Laffer, what is that sweet spot? One interesting note is that Keynes himself thought that 25% of GDP passing through the government's hands was probably as high a portion as we would want.

However, it's also true that growth purely as growth isn't the only thing we want:

There is also another issue which can get lost – the fact that maximizing growth rates is not necessarily the government’s highest priority. Issues of equity, fairness and concern for the environment are arguably more important than maximizing rates of economic growth.

As indeed it is also arguable that they are not. But I'm entirely happy to accept that stricture, that economic growth isn't the only thing we want out of an economy. What this Rahn Curve does allow us to do though is keep insisting that, as ever in economics, there's a trade off here.

How much equity and fairness now are you going to insist upon at the cost of making our children poorer than they could be? Given that we can't have both, a decision has to be made. And that's very useful in itself: a counter to those who say that greater equity now will make our children richer. It won't.

There was much irony and turning of tables at Whitehall this week. Yesterday, the Telegraph reported that more than 1,000 senior civil servants would receive bonuses of up to £20,000 this summer. According to Dame Helen Ghosh, Permanent Secretary of the Home Office, the sums are “not exactly big bucks”. The total cost to the taxpayer is estimated at £10 million. Well, a mandarin’s stay in Santorini is better value for money than, say, the fire brigade, right?

At issue are the hypocrisy and merits of awarding the bonuses. One of the most useful verses I’ve retained from Sunday school is Matthew 7:5, “Thou hypocrite, first cast out the beam out of thine own eye; and then shalt thou see clearly to cast out the mote out of thy brother's eye.” Ministers had called on officials not to take their bonuses but were dismissed. Big bonuses. Bad timing. Shamelessness. Sound familiar? The government should not impose a super-tax against banker bonuses while it keeps its own bureaucrats on the gravy train. There is less call to meddle in the private sector than to get their own house in order.

It is also unclear how effective the bonuses are as performance incentives. The Ministry of Defence has experienced its fair share of scandal this year, with £6.3 billion in assets unaccounted for, and yet its officials will still receive bonuses. If bonus grants are unresponsive to serious controversies like that, then there appears to be little link between performance and reward.

A Cabinet Office spokesman said on Wednesday that the Coalition government plans to “restrict bonuses for senior civil servants to only the top 25 percent of performers.” This is a move in the right direction. Performance-based incentives, when they actually tie performance to reward, increase productivity. They might well be used to make departments more cost-effective. To achieve this, though, the Coalition must be prepared to reduce salaries and marry bonuses to measureable success.

David Cameron and his Cabinet seem to be much taken with the "Nudge" idea. So do all of Ed Miliband's people as well. The basic idea is that people aren't all that good at making choices of judging risks: therefore they should be nudged into taking the right decision.

That a cabinet of Old Etonians think they should tell the proles what to do is not a surprise, nor a similar desire in a near random bunch of socialists and hangers on. Born or anointed through good intentions, the outcome is the same, the upper middle classes get to tell us what to do.

There is however a real problem with the whole idea: the things that we get nudged to do will inevitably reflect the prejudices of those setting up the nudges. OK, maybe opt out rather than opt in will increase organ donations, maybe opt out will increase pensions savings. And it's an article of faith in certain circles that more organ donations, more saving for pensions, is a good idea. Maybe they are, maybe they're not (and I could put up decent rejections of both propositions).

However, as Eric Falkenstein points out, the nudges will only be in favour of those things which the groupthink of the limited circle thinking them up already regard as obviously desirable goals.

Take something like irradiating eggs, something almost all scientific people agree is good (kills bacteria, no residual radiation). Why not make them the default eggs? They never would argue for that, because it's contrary to the Luddite-leftists who hate technology but love government.

Why isn't GM the default? Why isn't the presumption that planning permission has been granted? Why, under EU law, must I seek permission to make and sell apricot marmalade (yes, really!)?

Another way of putting this is that if we're all bad at making decisions, then why should we enshrine in law one set of wrong prejudices over just leaving the population to follow their own?

The Economist reports on an interesting innovation in Singapore. To encourage more people to take the bus to work, travellers will be entered into a lottery every time they get the bus – and three times for every off-peak journey they take. The idea is that people are risk-taking when the stakes are small:

Offer individuals 20p to leave the house an hour earlier, and most will say no. But a 1-in-50 chance of winning £10 may seem more enticing.

The risk-seeking effect is amplified in small networks: regularly hearing about other winners leads individuals to overestimate their own chances of success. This worked particularly well in Bangalore, where Infosys commuters shared a workplace, and scheme winners were advertised through the company. The scheme in Singapore would aim to create a social network among users to produce a similar effect.

The hope is that the project will eventually be self-funding.

So, could a Singapore-like system work in London? I’m sceptical about how effective Singapore’s plan will be for them, but on the margin it might make things a bit better. The problem is that city bus companies are bad at innovating at the margin – picking the low-hanging fruit first – and usually end up wasting money on white elephant projects, like the new bus designs churned out every couple of years with great Mayoral fanfare.

TfL’s bus service is OK, but it gets around half a billion pounds worth of subsidies every year. Congestion in the capital is also crippling for the service: though many people do get the bus during rush hour, it goes incredibly slowly. Compared to the even more heavily subsidized Tube network, it’s a pretty unappealing option if you’re in a rush to work.

So, what’s the solution? Honestly, I’m not sure. A sophisticated road pricing scheme coupled with privatized roads might be the best option but, in cities at least, it’s a political fantasy right now. I think the next best solution would be to privatize the bus system and open it up to new competition. It’s happened in Manchester, with quite good results, and could happen here as well. I don’t know how to make buses nicer, but there’s no greater discovery process than the free market. If a Singapore-like lottery scheme works, great. If it’s something we haven’t thought of, even better. The great upshot of a private municipal bus system is that there will be “neighbourhood benefits” for everyone who doesn’t use the bus – a better, more competitive bus network would take cars off the road and reduce congestion in the capital for everyone.

For the most part, radical reform of government services cannot occur. Large organisations are inflexible and, in the face of changing circumstances, those that can no longer well function die, and are replaced by the growth of new organisations or existing small organisations into large organisations which, although equally inflexible, are suited to the current environment. As such, reform of the NHS is impossible. The NHS cannot be fixed.

I think it is in fact not merely a matter of reform being impossible. It is also, I suspect, a matter of the British public paying very large amounts of tax and seeing, on the whole, very little for it. The NHS is a very visible service where those who pay feel they are in fact receiving something for all that they pay, and so there is massive resistance to anything which would on the face of it reduce the service provided. The NHS's visibility makes it seem like better value for money than it really is.

I propose, then, a mechanism for making the NHS irrelevant, an approach which requires no reform of the NHS proper and which will not fail in the face of the public's desire to see something for its tax money.

There are now those who pay twice for health care: those who contract to private health care providers, but still are forced to pay for the NHS through their taxes. Clearly, these individuals have removed the burden and costs of their health care from the NHS. Why, then, is it that some individuals pay twice, while others (users of the NHS) only "pay" once? This is clearly unfair, and should be resolved.

I propose a simple reform that leaves the NHS untouched: people who contract to a private health care provider should receive a full tax rebate of the money taken from them for their public health care provision.

As individuals depart from the NHS, the part of tax which which forms healthcare will decline. Accordingly, the rebate will decline. Eventually, with a competitive market of health care providers where the NHS is but a player, the anomaly of its funding being intermediated by the state could be removed and those contracted to the NHS could then, as they would with other providers, simply pay directly.

For this to work, no reform of the NHS is required. The NHS simply becomes a player in the private health market, subject to success or failure by its own merits. Individuals may chose to use the NHS, should they wish; equally, they may wish to use another health provider. Contracts are no longer being imposed by the state. Freedom would be introduced to the healthcare market.

The first subversive act I can remember carrying out was during the spring of my senior year in high school. At the time, I had signed up for intramural ultimate frisbee – I didn't take to interscholastic sports and never saw the point of spending my weekends being carted off to faraway destinations in a van, just to throw a ball at some people I'd never met before. Everything was going swell until one day, after arriving to practice bare-footed as usual, I was ordered to go back to my room to throw on some shoes.

I was stunned: mandating shoes for frisbee constituted a wanton and savage violation of both natural justice and the very raison d'être of the sport. When I quite rightly asked how such a rule had come about, I was told by the supervising faculty member that it was "policy" put into place by a personal edict from the school's athletic director, a highly unpleasant man whom for present purposes we shall call "Rupert". This only made matters worse: I'd crossed paths with Rupert before and did not care much for him, nor he for me. So, within earshot of forty people or so, I offered a pithy but nonetheless colourful one-liner about Rupert's abilities as a policymaker (which I shall not repeat, save to say that it included the word "worthless"). In exchange for my wise counsel, I was invited to spend a day working in the school's mail room. But gosh, was it fun – and totally worth it.

With that in mind, you might understand why I was disappointed when, a few weeks ago, the infamous hacker group known as Lulz Security disbanded. Claiming loose affiliation to the global Anonymous movement, LulzSec – in a series of very public and highly illegal operations – fiddled with the computers of major international companies and organizations including Sony, Petrobras, News Corp., and various government agencies, including the CIA. (They even hacked my brain: after visiting their website, I had the theme song to "the Love Boat" stuck in my head for over a week.)

But hacking into a computer and my brain is not, on its own, newsworthy: people do this sort of thing all the time without getting mentions in the Wall Street Journal and the FT. What makes these fellows special is that they aren't doing it for financial gain, or for fame and glory; they're doing it, above all, because it was amusing: "we've been disrupting and exposing corporations, governments, often the general population itself, and quite possibly everything in between, just because we could." But even this is insufficient to explain the popular fascination with this merry band of computer hackers – for awhile, the whole world knew what they were doing, and seemed utterly fascinated by it. So why did they get so much attention? [Continue reading]

In a recent report (PDF) published by RenewableUK and Energy & Utility Skills, the authors suggest that the wind and marine energy industries have the potential to contribute heavily to job creation given that a correct policy and legislative framework is implemented. Although this is an encouraging message, we ought to study the lessons to be learned from Denmark, the once so promising first mover in renewable energy.

Three market development scenarios, measured by the extent of deployment of wind and marine energy, are set out in the report. By 2021, the low growth scenario envisages the support of 44,000 jobs, medium growth is anticipated to result in the creation of 67,200 jobs, and high growth may well create 115,000 jobs, most of which require a particularly skilled workforce. These numbers account for full-time employees whose jobs are directly or indirectly (i.e. in the supply chain) created by the growth of these industries. For this growth to be possible, however, the authors call for substantial investments in the workforce in order to facilitate the provision of much needed skills.

If this growth, partly at least, relies on government involvement, we must be aware of the achievements and failures of foreign governments. In 2009, CEPOS, an independent Danish think tank, dared to slaughter a sacred cow when it commissioned a report (PDF) on wind energy in Denmark. The main argument of the report is that the successes of Danish wind energy are heavily overstated. More specifically, the use of government subsidies to support the development of wind energy has merely detracted labour from other sectors, and Denmark will as a result fail to observe a net increase in employment in the long run.

If the figures below are correct, CEPOS has certainly highlighted an important issue in policy-making in this specific area:

Allowing for the theoretical possibility of wind employment alleviating possible regional pockets of high unemployment, a very optimistic ballpark estimate of net real job creation is 10% of total employment in the sector. In this case the subsidy per job created is 600,000- 900,000 DKK per year ($90,000-140,000). This subsidy constitutes around 175-250% of the average pay per worker in the Danish manufacturing industry.

In terms of value added per employee, the energy technology sector over the period 1999-2006 underperformed by as much as 13% compared with the industrial average.

This implies that the effect of the government subsidy has been to shift employment from more productive employment in other sectors to less productive employment in the wind industry. As a consequence, Danish GDP is approximately 1.8 billion DKK ($270 million) lower than it would have been if the wind sector work force was employed elsewhere. [Emphasis mine]

Thus, had the market forces been allowed to function freely, the resources could have been used more efficiently elsewhere. It should be mentioned that the authors of the report published by RenewableUK and Energy & Utility Skills emphasise the promotion of incentives for private sector investment in wind and marine energy industries. Whilst this is essential, there is a risk that private sector initiative will drown in government subsidies. The politicians should indeed allow the wind and marine energy industries to flourish, but let us not accept an unwise use of subsidies that is bound to destroy the long-run potential.