The Pin Factory Blog

Miriam Rosen, the Executive Director of Ofsted was our Power Lunch guest this week. She outlined the schools regulator's way of working, which involves a lighter touch for good and outstanding schools and more emphasis on the less satisfactory ones.

There are 1001 things one can try in order to improve education – including spending hundreds of millions on new buildings, as Gordon brown has done. Sure, kids have to be treated as individuals and not statistics (which the obsession with exam results does not help either), and need a degree of discipline in order to learn anything. What seems to come out from Rosen's experience, though, is that what really makes the difference in education is good teachers and good teaching.

That chimes in with the work of James Tooley, who can point to countless excellent schools in Africa and India which do not even have buildings, with the teaching taking place under the shade of a tree. But if it's good teaching, it works – so much so that even the poorest parents are willing to pay for it.

But talent costs money. Many excellent teachers give up because they simply can't afford to live in some of the more affluent areas; and who wants to go to a failing school in a tough part of town unless they are decently rewarded? Naturally, the problem is the politicisation of education, in which remuneration is seen as an exercise in promoting equality rather than in steering talent to where it is needed (and telling non-talent that it isn't wanted, frankly). Until schools manage their own budgets and decide their own pay scales, I can't see things improving.

At the moment President Obama is riding high on the back of the passing of his healthcare plans, but before too long he, and the US economy, will be on a downswing again. That's according to Dominic Frisby of Money Morning, who believes you can see four-year up and down cycles in stock markets in America, and indeed all over the world.

He's got some charts from the Dow and the Nikkei to back him up, and yes, you do see cycles, some more pronounced than others, but definite four-year cycles nonetheless. So the question is, why do they exist?

It's simple, and it's back to government as usual. With a four-year election cycle, there is an upswing of optimism that comes in with any new President. Then the administration starts doing all the 'bad' things it needs to do to balance its books, and optimism wanes. So we head on to a four-year low. Then the administration's focus turns to getting re-elected, so it starts spending money like water and the markets turn up. Pretty soon that turns out to be unaffordable and...well, the rest you know.

It's plausible; and on this theory, the second half of 2010 will be a lot uglier than the first. We've already had the high point of this particular cycle. Buckle up for the descent.

The finances of the UK must be brought under control. David Cameron is planning on cuts. But where? The NHS? Nope, off-limits. The behemoth will stumble on, consuming tax dollars and laying waste to the quality of health care. Education? Protected I’m afraid; in contravention of advice offered by this think tank, Britain’s higher education system will continue to be funded by the population at large rather than those who actually benefit from university. Foreign aid? Also protected.

The simple logic of having protected areas of the budget suggests that there must be more severe cuts elsewhere. But rather than face up to this reality, or drop the notion of protected areas, the Tories seem to be instead toning down initially aggressive rhetoric on balancing the books. I understand that political expediency is important, but so is running the country. Rather than making explicit promises to ‘cut the deficit, not the NHS’, Cameron could be discreet. It would leave him room to manoeuvre when cuts are being made. Just as distressing is the shadow universities secretary’s proposal to create an ‘inspectorate’ to ensure high standards. Bureaucracy doesn’t create high standards; competition and choice does. Mr. Cameron should know better.

The Tories are the party that have spoken with the most honesty on what needs to be done to revive the country’s economy. But this has been muddled by numerous contradictions. Those of us who’ve read our Atlas Shrugged know that when there appears to be a contradiction, we must check our premises. And indeed, the premise that Cameron intends meaningful cuts is seriously in doubt.

Whatever the Chancellor says today, everybody knows that this is a phoney Budget. Like the 'phoney war' of late 1914, the true horrors are yet to come. The real, blood and guts, Budget will come at the end of June, after the election is out of the way.

The Chancellor will certainly bask in one ray of sunshine – the economy looks a bit less dire than he predicted last November. Businesses have held on, and tax receipts have held up. Job losses have not spiked, so nor have benefit costs. Inflation is moderate. All that paper – or rather, electronic – money that the Bank of England created has definitely had its effect. So the Chancellor will not have to borrow as much as he feared. He may even have room to toss us a few eye-popping pre-election sweeteners.

But you cannot keep cloning funny money for ever. The pound has already plummeted. And we are also lumbered with a national debt that stands at wartime levels, and is scheduled to increase year upon year upon year, as far as anyone can predict. We have borrowed to pay off yesterday's bills with tomorrow's earnings. The interest payments on our debt mountain will soon be more than the defence budget. if we had not borrowed so much, we could slash income tax by a third – and grow our way out of the financial crisis.

Britain is a mature economy, its debts are long-term, and the bailiffs aren't going to demand that everything is repaid tomorrow. So talk of us having to go cap in hand to the IMF may be exaggerated. But the interest and repayment burden is going to be with us for years – indeed, for decades. We face the awful – 1970s revisited – prospect of our own debt-laden economy lying stagnant as China and others race ahead of us. Things won't get worse, they just won't get better. We probably won't even notice it happening, but we will slip down the league of economic powers.

Raising taxes would be counterproductive, prompting even more wealth- creators to leave the country. The only way out is deep cuts in public expenditure. But then public expenditure has increased by a third since 1997 – and has all that bought us anything worthwhile? We need nothing less than a complete re-think of what government exists for, and which parts of it we want to keep and even expand. But there is room for very large savings in departments, quangos and programmes that have simply grown, but which deliver little of value.

Why Obamacare is based upon the logic of underpants gnomes.

“I’m like a cab for hire – for up to £5,000 a day”. Stephen Byers’ claims to have accepted financial payment in return for influence on government policy should not be too surprising. Politics is prone to manipulation by interest groups.

This problem is universal, but it is worrying that the issue is rarely treated in terms of the fundamental incentives at play. Politicians are human, and as such they respond to financial enticement - the platitude ‘everyone has their price’ must not be forgotten in this discussion. The point is that there is always an asymmetry of resources between large firms who can organize effective lobbying campaigns, and members of the public whose voice is heard only once every four or five years. The problem is inherent to public office, a ‘Government Failure’.

It is misleading that many of the media reports on this issue seem to gravitate towards a discussion of the lacking integrity of those involved. This distracts from the point that the problem is a structural one, stemming from the misalignment of the incentives of politicians and the ‘public good’.

I am skeptical about the prospects of successful reform on this issue. Any new rules and regulations will be written by politicians and civil servants, who have absolutely no incentive to effectively cut off what is a potential cash cow for them. Complete transparency would theoretically act as a disincentive to engage in such activities, but it is not difficult to imagine ways around such measures. It is hardly possible to monitor every conversation a minister has.

The responses of politicians have been equally misguided. David Cameron has said:

These are shocking allegations. The House of Commons needs to conduct a thorough investigation into these ex-Labour ministers

Cameron seems to imply that the problem is unique to the Labour Party. The Conservatives may score some points off the back of this, but the fundamental conflict of interest remains regardless of who is in power.

All this would be worrying at the best of times. But with the increasingly hyperactive FSA and increased regulatory proposals emerging from government, Byers’ claims contradict the idea that public officials always make decisions based on sound reasoning of what is in the ‘public interest’. It is difficult to imagine the much-needed injection of competition into the banking sector taking place given the powerful international lobby on behalf of the monopolistic behemoths such as RBS and Lloyds TSB – HBOS.

But back to parliament; the current guidelines relating to lobbying rely far too much on the personal integrity of the individual in power:

Holders of public office should take decisions solely in terms of the public interest. They should not do so in order to gain financial or other material benefits for themselves, their family, or their friends.

Is this really a sustainable position? This latest revelation, coupled with the recent expenses scandal, should raise suspicion amongst the public as to the potential malleability of those setting the policy agenda. To reinterpret a phrase of Nietzsche’s, they are “human, all too human”.

Sino-American relations have been fragile lately as American legislators levy accusations of unfair trade practices against the Chinese government. A certain amount of anti-China rhetoric always accompanies a new White House administration – in fact, the Obama administration has had relatively peaceful relations compared to the early Clinton years. And Treasury Secretary Timothy Geithner is well versed in Chinese affairs and has done what he can to avoid labelling China an official ‘Currency Manipulator”. But inevitably, and particularly with Democratic presidents, there is pressure from unions and economic nationalists to face down the perceived Chinese beast.

Of course, an appreciated Chinese currency would drive the prices of Chinese consumer goods up, which would in turn affect importers of Chinese goods. And of course, bilateral trade deficits are meaningless, given the multilateral nature of industrial inputs. But American politicians seem more interested in pseudo-populist rabble-rousing than in opportunities for growth.

The Chinese government does freely engage in protectionism, but the best thing the US government can do is to do nothing. Divisive accusations and tariffs will only create an escalating trade war that will hurt both sides. This is particularly true because the Chinese government is eager to appear independent of foreign influence before hawkish Chinese nationalists. China is less likely to appreciate its currency or take other steps to reform if it is being chastised. Both governments would do well to keep their hands off trade. Minimising petty recriminations and provocative rhetoric will make that more politically feasible.

Britain's government sector is now bigger than its private sector. It accounts for 52.1% of Gross Domestic Product according to the OECD – the highest since the organisation's records began. Sure, government was even bigger in the early 1940s, but then at least we were fighting a war to save Europe from Nazi dictatorship. There is no such excuse this time.

In 1900, the government was a mere 15% of the economy. It was given a boost by World War I, but for most of the interwar years it remained in the 20%-30% range. After World War II it stayed below 40% until Harold Wilson's 1964-70 Labour government broke that barrier, and now Gordon Brown has taken it through the next.

Keynesians might rejoice: spend your way out of recession, they say. The trouble is that governments spend other people's money. And those people, in the private sector, can spend – and invest – it a lot more efficiently than civil servants can. The Keynesian solution takes money out of the wealth-creating side of the economy and throws it into the wealth-spending side. That is no way to generate the new economic growth that we need to earn our way out of the debt dungeon. We need to reduce government spending drastically. And that requires nothing less than a complete re-think about what government departments, agencies, and programmes exist for.

A perfect picture of British politicians still not "getting it" came with Saturday's news that photographer Simon Roberts has been commissioned by the Speaker's Advisory Committee on Works of Art to document campaign activity in the run-up to polling day. Yes, taxpayers will be paying for Mr Roberts to travel around the country in a motor home during the campaign to shoot a few pictures.

The Advisory Committee's announcement gave no indication of how much this will cost and, in the greater scheme of things, it probably isn't a lot. But against the background of the MP's expenses scandal and the ever-ballooning government debt load, surely this august committee whose mission is to look after Parliament's art collection could have sent out a stronger signal that correcting both problems (their expenses and the national debt) can only be met by a relentless battening down of the spending hatches.

Given the wall-to-wall media exposure the campaign will receive, a few more photos for Parliament's art collection really are a luxury the country can do without. Egregiously, Mr Roberts himself is asking the public to send in yet more photographs of local campaigns for an online gallery, with some images selected for display at the official Commons exhibition after the election. Just what taxpayers want to see their money spent on - pictures of politicians.

Mr Roberts says "I'm particularly interested in the relationship between politicians and the public." Let's hope he snaps arrogant politicians on the receiving end of some airborne tomatoes and rotten eggs.

If you're new to the Committee's activities, check this link for recent, uncosted, acquisitions.

Saturday: The Great Flying Banana

Sunday: On the unnecessary nature of much regulation