The Pin Factory Blog

The NHS reforms ought to suit the Liberal Democrats just fine. After all, a key part of being a Liberal is belief in the market; and these reforms are trying to get an internal market to replace a state monopoly. And in the Orange Book, written by people like David Laws and Nick Clegg, Vince Cable and Chris Huhne, in 2004, an insurance-based NHS was proposed.

Then in last year’s election sentences like this appeared in their manifesto:

“Putting front line staff in charge of their ward or unit budget, and allowing staff to establish employee trusts giving them real involvement and say over how their service is run.”

“Giving local health boards the freedom to commission services for local people from a range of different types of provider.”

As if that wasn’t enough, Nick Clegg signed the White Paper, which was read and approved by Danny Alexander months later. Then it was voted for at first and second reading. But now Nick Clegg is going back on his promise. However, no one is going out to protest. No one is rioting in the streets. The unions are not up in arms. Why?

All parties have their split: Tories on Europe, Labour on AV. The Liberal Democrats are an odd amalgam of liberals and social democrats. And the people vocally opposing the bill are Shirley Williams and Norman Lamb (not exactly the loyal retainer): both are on the left wing of the party. And that is where the vote lies. They increased the number of seats they hold steadily under Ashdown and Kennedy – both social democrats. And Kennedy abstained on the vote in the commons. 

One can’t help feeling cynical about why all those protestors aren’t up in arms about this like they were with tuition fees. Then they thought Clegg was making them pay for something they didn’t want to pay for; now they think that he is trying to prevent Lansley making them pay for something they don’t want to pay for. Last time they were outraged at the betrayal, “A pestilence on him for a mad rogue!” This time they are placated by a betrayal.

Of course, there is a less cynical answer to this. There are no protestors about this broken promise because there are no Lib Dem voters left to protest. Nick Clegg has looked his voters in the eye and told them he’s going to break a promise (expecting, presumably, some moral grandstanding and flaming police vans in Whitehall) and all he sees is a skull to mock his own grinning.

Either way if Nick Clegg is serious when he says his party needs to learn lessons from last week's election, then he could start by keeping a promise that has passed through a book, manifesto, white paper, and commons vote. Last time he abandoned his voters; now he appeals to them, abandoning his colleagues. He needs to pick one and stick to it. Otherwise he might find that his political collapse will bear less resemblance to Hamlet’s indecisiveness, than to Yorick’s brief cameo; less the noble Dane than the fellow of infinite jest quite chap-fall'n.

All political lives end in failure. Clegg needs to realise, more and more as time passes, that past is prologue, and in the future he’ll need some allies.

The housing market is, almost certainly, a bubble. As the graph of inflation-adjusted house prices above (taken from HousePriceCrash.co.uk) shows, there has been a steady rise in the real cost of a home over the past fifteen years. Like most other bubbles, it is a product of sustained government policies designed to privilege a special interest group – in this case, homeowners.

Government after government has tried to keep the bubble inflated to avoid their wrath. The more people throw their life’s savings into housing, the more the pressure on government grows to protect these investments. The consequences for the rest of the country have been ruinous: increased cost of rents, urban sprawl, inflation and a shortage of affordable homes. The poor – who are also the least electorally engaged, and so less important to politicians of all stripes –have been especially hard-hit.

In an ordinary industry, the huge demand for housing would provoke a big increase in homebuilding, including at the lower end of the market. But the supply side of the housing sector is tightly bound by the planning system. The planning laws in this country are a classic case of NIMBYism. Increasing the supply of homes in an area will reduce the cost and value of homes already there, so local authorities have no incentive to ease regulations to increase supply. Such is the flaw in democracy – established groups can use government to restrict competition and enrich themselves.

So, rather than tackling the supply side of housing and trying to create more homes, the government throws money at the demand side. But this only makes the problem worse. Shared equity schemes and artificially-cheap credit, created by the Bank of England, all lead to increasing prices without a corresponding increase in supply. Home buyers depend heavily on borrowed money, so the political pressure on the government to keep the price of money low is enormous. And the higher prices grow, the greater the pressure is to make borrowing cheap. This whole mechanism entirely divorces interest rates from their true function, which is to reflect the supply and demand of money – ie, savings and borrowing. This disrupts relative prices (and thus the structure of production) across the whole economy, and fuels the bidding war over houses.

If government’s protection of house prices was removed – most importantly, the planning system that depresses supply and the artificially cheap credit that inflates demand – the supply of houses that people want to live in would rise and house prices would fall. Homeowners should not be able to use government to protect their investments at everybody else’s expense. With a looming housing crisis and house prices at an all-time high, it's time to let the bubble burst.

Today the ASI publishes a new report, Reflections on Regulation: Experience and the Future (PDF). The report features articles by five former regulators with diverse industry experience – Stephen Littlechild (electricity), Ian Byatt (water), Chris Bolt (railways), John Swift (railways) and Graham Corbett (post). Tim Ambler, an academic who has studied this area extensively, summarizes and offers a number of different paths that regulation may take in the future. ASI Director Eamonn Butler has a summary, outlining his own thoughts on the future of regulation.

The rise of utilities regulation took place in the 1980s, as the Thatcher government’s attempt to ease the teething troubles of newly-privatized sectors. It was the most politically feasible way of implementing widespread reform – fears that a privatized state monopoly would simply be a private monopoly abounded, and the promise of some state oversight to prevent abuse soothed many troubles. My own feeling is that, while regulated capitalism was a definite step up from state socialism, we have moved past this and it is time to start disassembling the government’s regulatory framework and encouraging self-regulation, one of the paths that Tim Ambler suggests.

Self-regulation isn’t as toothless as it sounds. Many firms rely on their reputation for their success – think about how generous food companies are when you find a hair in a tin of baked beans – and there is every reason to think that, in the absence of a state regulator, firms would set up an independent regulator to monitor their activities and vouch for them to consumers. And any companies acting fraudulently or otherwise illegally could still be met with the full force of the law – the idea that getting rid of regulators would mean that companies would be allowed to lie to consumers is, simply, wrong.

Today’s report offers insider perspectives on the regulatory industry, with an interesting discussion of the roads that the government could take as it tries to reform the sector. What needs to be removed is the attempt to plan or engineer competition: competition can’t be designed, it can only happen organically and spontaneously.

City AM in London reports on the ongoing financial crisis in the weaker economies of the eurozone. Greece has a €110bn bailout, but it faces a €27bn funding shortfall next year. Yields on Greece's two-year debt are over 25 percent (yes, 25 percent), and 15.7 percent on its 10-year notes. Still there are high-level meetings and renegotiations, and new packages hastily put together. Ireland and Portugal are less bad, but still bad. The formula of making taxpayers bear the burden of bank losses only goes so far in democracies, as the Icelandic electorate has twice shown. There is little chance that the Greek, Irish or Portuguese voters will accept the years of poverty and indebtedness which are the conditions of their bailout terms.

The markets have pretty well decided that the only way out is for defaults, leaving bond-holders out of pocket, and for some countries to quit the euro so their currency can find a market level compatible with their real status. Yet the politicians are desperately holding out, offering patch after patch to a problem that is clearly going to burst sometime. They have invested political capital in the euro as a political, rather than an economic entity. It was always absurd that some countries were allowed to join it, and now that absurdity stands exposed.

At some stage reality will out. There will be defaults, accompanied by exits from the euro. Then the battered economies can start to recover. Getting rid of the debt and devaluing their currencies will enable them to rebuild their economies and start the upward climb again. It is time to stop pretending and to take the hard decisions that will get it over with.

So now it’s official: of the 323 free school proposals received by the DfE as of 11th February, 282 were turned down. Less than 50 were given an amber light. It looks likely that roughly ten will open their gates in September. The century of civil servants seconded to process applications can breathe a sigh of relief and go back to whatever it was they were doing before they were so rudely interrupted, for it’s unlikely under the strictures of the new applications process that for 2012 there will be anything like the volume of the first tranche.

With the programme’s capital allocation for the first two years long since exhausted, and the government reluctant to enlist the help of SMBs and private equity backed chains, fewer of these proposals for 2012 can realistically be expected to make it through its new competitive tendering stage. While the Chancellor’s Budget Day announcement that the proposed reforms to local planning process weren’t quite dead in the water offers a glimmer of hope on the horizon, the free school initiative nevertheless seems already to have become the ‘niche programme’ that Rachel Wolf feared it might.

Much as we might wish to think otherwise, this has serious implications for the government’s wider schools reform platform: most especially in respect of its hopes of efficiency gains through school closure. The idea was that by freeing up new school supply, while at the same time rationalising existing management structures through Academy expansion, the government might also be enabled to tackle more proactively the problem of persistent under-performance, at its most acute in areas where deprivation is greatest. But without new schools coming on stream in numbers, the threat of closure rings hollow, and one of the most important mechanisms for turning around these schools doesn’t work as it should. [Continue reading]

Britain's Conservative / Liberal Democrat coalition government is a year old. So how is it doing? Not very well right now, one has to admit. But then this period after the national referendum on electoral reform – demanded by the Lib Dems as part of the price for their partnership with the Conservatives – was never going to be happy, whichever way it went. Humiliated in the referendum and in the local government polls last week, leading Lib Dems have hit out at their coalition partners – and demanded more say on policy in order to placate their own rank and file – many of whom are deeply unhappy about what the coalition is doing, particularly its rush to cut public spending in order to stem Britain's ever-burgeoning debt.

Looking at the mess that Ireland, Portugal and Greece are in, the fact that the coalition is aggressively pursuing a deficit reduction programme must be a positive move. So is its plan to take people on incomes below £10,000 out of tax entirely, which will encourage people off state benefits and into work. That idea, interestingly, was pushed on the coalition by the Lib Dems, who got it from 'flat tax' enthusiasts like the Adam Smith Institute. And the Conservative side of the coalition has plans to introduce something like a negative income tax. Meanwhile, some state benefits and higher rates of civil-service pay have been frozen, quangos have been scrapped, students face higher university fees, the extravagant school building programme has been reined in, corporation tax is being cut. To economists, and to the international markets, this financial prudence all looks very positive too.

However, deficit reduction has come at the cost of higher taxes, such as a rise in Value Added Tax, a 50% tax on higher earners, and a rise in capital gains tax – demanded by Lib Dem Business Secretary Vince Cable – that most Conservatives think will damage business and prove counter-productive. A new windfall tax on oil exploration has had oil and gas firms threatening to close down production – further evidence that to grow its way out of debt, Britain needs to compete on the basis of lower taxes, rather than higher.

One of the coalition's most interesting moves – very much a Conservative idea – is to transform Britain's state schools into a Swedish-style system, where private companies or charities can set up and run schools, so getting choice, competition and innovation into education. The finance would still come from taxpayers, but it would follow parents' choices, rather than being directed by officials. If Sweden is anything to go by, this could bring real and positive reform into state education.

But a similar 'internal market' structure in healthcare – allowing private providers to take over services presently run by the state National Health Service medical monopoly, and having family doctors rather than central officials decide where the money goes – may fall victim to the unhappiness of the LibDem rank and file. The NHS may be an unmanageable 1.4 million workers strong, but the British public have a strong attachment to its principle of free (at the point of use) healthcare and the LibDems in particular don't want to touch it. This would be a sad loss; monopolies are never efficient, and a break-up of this vast state monopoly is long overdue.

Perhaps the most positive and remarkable thing about the coalition, though, is that, despite all the bickering, it has so far held together. Both Conservative and Liberal Democrat sides have committed themselves to stabilising the public finances, seeing that as the only way to provide a sound basis for business and economic growth. They have committed themselves – unusually – to a five-year government, by which time they think those policies will be working demonstrably. At the same time, the LibDems are bringing in a more liberal attitude on social issues, with less nannying and intrusion in everyday life. If the coalition partners can get through their present spat, which they probably soon will, it could turn out to be one of Britain's most reforming and most successful governments.

The good, the bad, and the ugly (Click to read)

The government has been criticised for its new "idea" for universities, to allow rich students to buy places at university. Students will be able to pay the fees that foreign students pay in order to guarantee a place in the course they want. Isn’t this just a sop to the rich that will further harm social mobility? Well, yes and no. It will benefit rich students, but it will open a great many other doors as well.

We are living through a crisis in university education. Last year, 188,697 university applicants failed to get a place after clearing, an increase of around 40% on the year before. This kind of shortage is all too predictable – when you set a price ceiling for something, you should expect shortages. For an example of this, look at the 1973 oil crisis. The US and UK imposed price controls and experienced fuel queues and shortages; Japan and Germany allowed prices to rise and consumption dropped in reaction, with fuel going to the places it was most in demand. So it is with university places – there is more demand than supply, so many people will be left unsatisfied. While this is true of the sector in general, it’s also true for specific universities. Demand for Oxbridge and Russell Group universities is far higher than the supply of places.

The government’s proposals would allow some applicants to pay their own way – creating a place that would otherwise not have existed. This is the crucial point to remember. If a girl's parents pay the extra price for her to go to Oxford, nobody else is deprived of a place. And the place is only available if she has the grades that would qualify her for it anyway. Because the sector is operating under capacity (thanks to the fees price ceiling), paying full fees for a place will create an entirely new place. It’s a positive-sum game.

Some say this is unfair because it offers the rich more options than the poor. But to stop people from being able to pay for places just to bring them down to the level of the poor is completely backwards – we should be trying to see how we can raise the poor up to that level. Equality for its own sake shouldn’t be the objective; what we want is to improve people’s lives. So how could we do this? Quite simply: by making sure that student loans are available to everybody with the grades needed for these places, and allowing universities to raise their fees to reflect the supply and demand for places.

More places would be created and the places lottery would be done away with – if you want to do medicine at Oxford, you’d better be prepared to make the same sacrifices that your competitors are willing to make. The proposals announced today will only entrench priviledge if people continue to insist on artificial depressing place numbers through the fees cap.

The legendary international relations theorist Francis Fukuyama has turned his attention to the evolution of governments, and therefore to Hayek in his new book "The Origins of Political Order". In a piece for the New York Times, he defends Hayek's status as a great intellectual, but criticises his ideas.

Firstly, he points out that freedom can be threatened by the powerful. He argues that central government has sometimes defended the liberty of the weak from the coercion of the strong. However, while it may be true that government can defend the liberty of the weak, the concentration of power in an institution able to use force makes that institution more attractive to capture by the strong. After all, the strong have the greater means, so what is to stop them furthering their own aims at the expense of the weak?

Secondly, he argues that Hayek's 'slipperiest of slippery slope arguments' in "The Road to Serfdom" does not automatically occur. He cites historical examples showing that moves toward greater government interference have stalled. But I don't think Hayek would dispute this, as he himself worked to reverse the trend. "The Road to Serfdom" was a warning so that we could recognise statism and attempt to stop it, rather than a description demonstrating the futility of fighting for liberty.

Thirdly, Fukuyama claims that Hayek contradicts his own 'knowledge problem' by being so certain that governments will fail at planning on others' behalf. However, this is not the case. Hayek simply points out that governments are more likely to fail. Firstly, if people have imperfect knowledge about themselves, then other people are likely to have even less knowledge about those they try to govern. Secondly, government does not experiment in the same way as people do, as it uses force to prevent failure, forces people to choose the same things, and uses force to prevent people from opting out. The state may occasionally get things right, but its use of force makes this very unlikely.

Lastly, Fukuyama complains that state and society must be divided according to empirical adaptation rather than the 'strict abstract principle' of freedom. But then, who decides?

Anton Howes is Director of the Liberty League.

Are you celebrating Europe Day? No, me neither. I don’t know anybody who did, except for the poor sods in government buildings around Westminster. It does seem odd, a fortnight after the splendid sight of Union flags ringing Parliament Square to commemorate the Royal Wedding, to see the same flagpoles flying the flags of the EU’s member states. And there is a difference – people obviously wanted to see the Union flags flying during the Royal Wedding, but who wanted the flags flying for Europe Day?

Europe Day must be the most top-down celebration day we have. Unlike the Royal Wedding, St George’s Day or even St Patrick’s Day, all of which are bottom-up celebrations that people would celebrate with or without any state endorsement, Europe Day is something that we’ve been told to commemorate. (Some will argue that the Royal Wedding is a state-sanctioned holiday, but it’s different to Europe Day in that people would have celebrated it even if there had been no state fanfare. It was spontaneous and bottom-up.)

I have no real objection to Europe Day, if people want to celebrate it. And, if enough people want to see something celebrated, I don’t mind if the government recognises that and flies the flag to mark the occasion. But my suspicion is that, in the case of Europe Day, few people would celebrate it if. Instead, I think it’s another brick in the wall of the EU’s efforts to manufacture a “European” identity. Other examples are the European “national anthem” (how can a non-nation have a “national” anthem?) and the European flag that must be flown outside government buildings in EU member states.

Supporters of the EU often claim that it’s a “post-national” body. Why, then, does the EU bother with the symbols of nationhood – flags, coins, anthems and holidays? This seems less like a “post-national” body than one trying to invent a new nation for itself. And this is a problem: like other “spontaneous orders”, nationality is hard to engineer from the top down without negative unforeseen consequences. See the failure of the Yugoslavian project for an example of this, as well as many post-colonial African states, like the Democratic Republic of the Congo whose problems are, in large part, consequences of successive government attempts to engineer ethnic identities there.

Thankfully, the EU’s failures in this regard will be more benign, but it should be clear that it is a bad idea for states to try to make a nation out of nothing. I’m not worried about bogeymen from Brussels hiding under my bed, but top-down planning of society is just as hubristic and short-sighted as top-down planning of the economy.