The small matter of the bill, Professor...

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Professor David Blanchflower has a post on the New Statesman blog today arguing that David Cameron's credit card analogy for the national debt is wrong:

Cameron shows no understanding of basic accounting. I guess that isn't surprising for someone who has never run a business and had to file basic accounts. Folks with silver spoons don't need to do that. Let me explain. There is an asset side to the balance sheet and a liability side. The national debt is not analogous in any way to a credit card. The debt has been used to pay for the infrastructure, roads, schools, ports, the Houses of Parliament, and even Downing Street.

Basically, Prof Blanchflower's argument is that government expenditure isn't analogous to credit card spending because, if done right, government spending would buy assets that would deliver higher long-term growth. Well, maybe. But the problem with this argument is that most government spending isn't capital expenditure – roads and new schools – but current expenditure. That's things like wages, welfare payments, pensions, debt interest, and other things that don't deliver an increased economic return.

As far as I understand Prof Blanchflower's blogpost, David Cameron is an economic simpleton because his maxed-out credit card analogy doesn't account for capital spending. But this implies that most (or much) of the government's expenditure goes on capital projects, which is simply untrue. Total Managed Expenditure (TME) was around £696.8bn in 2010-2011. Of this, capital expenditure was £59.5bn – just £9.5bn higher than the total interest on government debt that year.

In other words, the capital investment that Prof Blanchflower is talking about accounted for just 8.5% of total government expenditure in 2010-11. That's not quite the picture you'd get if you read his post by itself, and it gives the lie to the notion that we don't have a debt problem.

Think piece: The anger behind the strikes

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tubeWhat drives 750,000 people to the point of ruining everyone else's day by striking? PJ Byrne reflects on the "anger deriving from a wounded sense of self-worth" that drives so many people to strike over so small an issue.

Summer is very nearly upon us, and for many it is a happy time of year, one we associate with pleasant memories of carefree youth and halcyon days gone by. I for one remember, as a child, lazy Sundays fishing on the creek that flowed out of the marsh alongside our house; as a teenager, spending hot and breezy afternoons skippering a rickety, thirty-year-old catamaran on Long Island Sound; and, as a law student, flying back to America to watch the Fourth of July fireworks by the water with my family.

We all have comparable, though doubtlessly very different, memories and experiences of summer, and have been having them for hundreds of years – and, sometimes, people have described these in even more saccharine terms than I have just done. Take, for example, sixteenth-century poet Alexander Hume's ode to "A Summer Day": "The flourishes and fragrant flowers / Through Phoebus' fostering heat, / Refresht with dew and silver showers / Cast up an odour sweet... All labourers draw home at even, / And can to other say, / Thanks to the gracious God of heaven, / Which sent this summer day."

Unless, of course, those labourers happen to belong to a public sector union. As some of you might know, major unions in the UK are planning co-ordinated strike action this summer, which looks likely to go ahead. At least officially, this is being done to protect the unholy trinity of unionised life – holiday, pay and pensions – and it looks like they are going to try to spoil the party while they are at it. Strikes are planned across the government, which most of us are bound not to notice, except perhaps those of teachers and, in particular, transport, where tube workers are threatening to interfere with Wimbledon. Interfering with tennis is, of course, insufferable, and raises the question: during such a lovely time of year, when so much is going on, how can 750,000 people – all of whom have jobs in which they voluntarily consented to be employed – be grumpy to the point of wanting to ruin everyone else's fun?

View the whole article.

Four alternatives to the statist quo

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haber

Yesterday I spoke at Haberdashers' Aske's boys school, with students from the girls school visiting for the day. It was at a seminar on economics and business. My theme was that in many areas of current economic and social policy there is a conventional wisdom and an alternative approach. I went through four areas where this is true.

Firstly in university applications, it is assumed that standards must be lowered to admit more people from poorer backgrounds into good university places. I pointed out that this would lower standards, and diminish the standing of UK universities. Better, I suggested, to put extra effort into improving schools so that disadvantaged bright students can score the grades to gain university admission without needing preferential treatment.

Then I suggested that the "live simply" message of many environmentalists would be far less effective than generating the resources and the technology to achieve our goals with a smaller environmental footprint.

The third area, that of getting the rich to pay a larger share of the tax bill, could be achieved, I agued, by lowering rates. In the past this has brought in more revenue and had the rich paying a higher share of the total. At the same time we should be raising the threshold to take low earners out of income tax altogether

My fourth point was on the crisis, which I suggested had been caused not by greedy bankers taking reckless risks, but by politicians and central banks trying to smooth the business cycle and to extend home-ownership to those who could not really afford it.

At the very end I added the fact that we give dribs and drabs of overseas aid, while denying poorer countries by barriers and tariffs the ability to sell in our markets, the only thing that has actually made poor countries rich. We should buy their produce instead of handing out cash to their governments.

A thicket of summer grass: the thymotic anger behind the strikes

Summer is very nearly upon us, and for many it is a happy time of year, one we associate with pleasant memories of carefree youth and halcyon days gone by. I for one remember, as a child, lazy Sundays fishing on the creek that flowed out of the marsh alongside our house; as a teenager, spending hot and breezy afternoons skippering a rickety, thirty-year-old catamaran on Long Island Sound; and, as a law student, flying back to America to watch the Fourth of July fireworks by the water with my family.

We all have comparable, though doubtlessly very different, memories and experiences of summer, and have been having them for hundreds of years – and, sometimes, people have described these in even more saccharine terms than I have just done. Take, for example, sixteenth-century poet Alexander Hume’s ode to “A Summer Day”: “The flourishes and fragrant flowers / Through Phoebus’ fostering heat, / Refresht with dew and silver showers / Cast up an odour sweet… All labourers draw home at even, / And can to other say, / Thanks to the gracious God of heaven, / Which sent this summer day.”

Unless, of course, those labourers happen to belong to a public sector union. As some of you might know, major unions in the UK are planning co-ordinated strike action this summer, which looks likely to go ahead. At least officially, this is being done to protect the unholy trinity of unionised life – holiday, pay and pensions – and it looks like they are going to try to spoil the party while they are at it. Strikes are planned across the government, which most of us are bound not to notice, except perhaps those of teachers and, in particular, transport, where tube workers are threatening to interfere with Wimbledon. Interfering with tennis is, of course, insufferable, and raises the question: during such a lovely time of year, when so much is going on, how can 750,000 people – all of whom have jobs in which they voluntarily consented to be employed – be grumpy to the point of wanting to ruin everyone else’s fun?

I will admit here that my treatment of union grievances might seem flip at first glance. However, “grumpy” is a very good description of what is going on, though it contrasts sharply with what the unions want us to think – namely, that the proposed strikes are about economic justice. In a recent speech Len McCluskey, general secretary of Unite,described the strike as the latest iteration of a red-hot class war, a “fight… (against) bad employers… (and) the Eton classroom bully-boys running the government (who) want to cut… so the rich can keep on feasting”. He was even brazen enough to conclude his remarks with a line from the long-obsolete Communist Manifesto: “we still have a world to win”. But striking workers at the local Jobcentre are hardly the heirs of a centuries-old “struggle of the proletariat with the bourgeoisie”. What on earth are they upset about, then?

More likely, it is a sense of hurt feelings from a workforce that is both “dwindling (and) demoralised“, a sector of society that has failed to adapt to the new reality of austerity – and doesn’t want to, either. This phenomenon is not new, and in fact was the subject of extensive treatment in Francis Fukuyama’s landmark work The End of History and the Last Man, where Fukuyama points out that relative self-perceptions of worth, even among people who are well-remunerated, are central in politics. “In political life,” he writes, “economic claims are seldom presented as simple demands for more; they are usually couched in terms of ‘economic justice.'”

To him, these claims do not necessarily arise out of deprivation – poverty is relative, he says, pointing out that the poverty line in the United States “represents a standard of living much higher than that of well-off people in certain third world countries” – but adds that “this does not mean that poor people in the United States are more satisfied than well-to-do people in Africa… for their sense of self-worth receives many more daily affronts” from those who are better-off still. Fukuyama describes the emotion arising from these affronts as “thymotic anger” – that is, anger deriving from a wounded sense of self-worth – that exists because people “believe, consciously or not, that their dignity is ultimately at stake in disputes over money.”

I am inclined to agree with Fukuyama’s analysis. That thymotic anger is in play with these strikes is clear enough by reading the unions’ P.R. material, all of which strains desperately to prove the utility and necessity of public services on the one hand, and the quality of the labour that provides them on the other. Take this, for example: “cuts [in public services] have led to increased errors, backlogs in post and half the calls from the public going [un]answered last year”; put differently, “our work is necessary and essential, our profession delivers value when it carries on this work, and by cutting our budgets you do not accord our work its true value”. Or this: “whenever Jobcentre Plus staff have been allowed the same flexibilities and funding as private sector companies… they have been able to compete with, if not surpass, the performance of contractors,” in other words, “we are just as capable as you are, and can beat you at your own game. How dare you suggest otherwise?”

What we are left with is a simple truth, that human beings require dignity and recognition, and a complicated problem, that a large and well-organized group of public servants with hurt feelings will forever make limitless demands for compensation that British taxpayers cannot possibly meet. But how to resolve this? It would be ridiculous to suggest that society goes on subsidizing the self-esteem of nearly a million people if other solutions are available; one of these, of course, would be to dispense with significant pieces of the public sector, and reintroduce our union friends into our private sector world where work is valued not on the basis of the political power we wield, but rather on the value we deliver through the use of our energies and talents, and in particular, competition between employers in the labour market.

But this is only half of the solution. Bending others to our will through the use of political power is a convoluted and roundabout way to dignity; instead, developing our individual powers by pursuing creative or productive endeavours with “an emphasis… on the practice of life” (Fromm, 1955) is much more likely to lead us to happiness.

If you’re wondering where to start, I suggest a quiet, contemplative walk on a glorious summer day.

Ringfencing won't work

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George Osborne is set to announce his intention to require banks to ‘ringfence’ their retail operations. Essentially, the retail part of universal banks (the bit that deals with your savings, and makes loans to individuals and small businesses) will become a separate subsidiary within a wider ‘group’. That subsidiary will be separately capitalized and subject to its own capital adequacy requirements (the suggestion is 10% equity capital to risk-weighted assets).

The idea is that this ring-fencing will make it easier for the government to let failed investment banks go bust, since they’d be able to fail without ordinary depositors being wiped out in the process. And if ringfencing does make it clear to investment banks that they will not be bailed out, that would remove the implicit risk subsidy they currently receive, and make them behave more cautiously.

I’m not so sure. It seems to me that both Osborne and the Independent Commission on Banking have missed the point somewhat. The issue is not just that universal banks are using the implicit government guarantee that comes with their retail operations to take more risks on the investment side – as the ring-fencing proposals would suggest. In fact, banks are generally taking more risks – across their whole businesses – because of the government guarantee. It simply isn’t the case, as most people assume, that retail banking is safe whereas investment banking is risky. Remember Northern Rock? Or US sub-prime lending? The ‘utility’ has caused us as much trouble as the ‘casino’.

And the big, big problem with what Osborne and the Commission are proposing is that they are effectively making the government guarantee of retail banks explicit. And that, as Andrew Lilico convincingly points out over at the Telegraph, means retail banks “will have incentives to engage in the riskiest practices the nature of their businesses allow.” Ringfencing might reduce the risk subsidy that we’re giving to investment banking, but it increases the risk subsidy to retail banks, and will inevitably make them less stable and more problematic in the long run. Slightly higher capital adequacy ratios will do next to nothing to offset this.

I’ve said before that no amount of regulatory oversight is ever going to be able adequately replace proper market discipline in banking. If we want our financial system to be safe and stable, we need to get depositors, bondholders and shareholders to realize that their money is only safe as the bank that’s holding it. We need to get banks competing on their risk profiles, rather than just ticking the regulatory boxes and declaring to the world that they are safe as houses. And we need bank executives to know that their livelihoods depend on their investment decisions.

Whatever ringfencing would achieve, it would not achieve any of that.

Capitalism will deliver the innovation that education needs

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The third Annual Venture Capital in Education Summit is currently taking place in New York which brings together a select group of entrepreneurs and investors with the hope of accelerating education innovation and investment.

Ten early stage education technology companies are being showcased, including: Magic Planet - a digital display with a sphere-shaped screen which provides global information visually; Late Nite Labs – a virtual lab platform which contains 150+ experiment simulations for distance and hybrid learning settings; LessonWriter - an expert-system that automates the detailed and time-consuming task of creating teaching materials, individualizing instruction and assessing performance; Skillshare - a community marketplace for offline classes whose mission is to democratize learning, turning cities into classrooms and its inhabitants into teachers and students; and many more exciting innovations that could revolutionize education.

A key theme of this summit will be the future potential of gaming technology in education which is perhaps one of the most exciting developments to take place in this sector for a generation. Students are already beginning to learn in virtual worlds such as GAIAonline, Neopets and Club Penguin and new adaptive learning games include MangaHigh, Dimension M, Dreambox, Carnegie Learning and Reasoning Mind. Leading the field in this area include organisations such as Games for Change, The Education Arcade, the Learning Games Network and Quest to Learn - a new game-based school in New York with an inquiry-based modular curriculum which incorporates gameplay dynamics into the learning experience.

The summit is designed for educational entrepreneurs and those committed to providing the capital and resources to support their latest ventures, including: angel and seed investors, venture capitalists, venture philanthropists, foundations, private equity investors and directors of education ventures. Politicians and bureaucrats are not invited, which suggests that their role in the future design and development of education is now becoming increasingly irrelevant.

A free market in adoptions?

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adoptIf you’ve been following Made in Chelsea, you may have had the thought, “Where are their parents?”. The answer is more than likely Saint-Tropez.

The truth is that anyone who is physically able to do so may have children and, for the most part, may raise them with a free hand. The state does not purport to know who will be a good birth parent, and does not attempt to stop anyone from reproducing. Curiously, though, it places severe restrictions on those who would adopt. This raises the question, is the state’s monopoly on adoption legitimate? Is there any real difference between being “unqualified” to adopt and being similarly hopeless but nonetheless giving birth to a child?

Were we to poll, one might expect to see strong support for restrictions on, say, sex offenders adopting at the same time as strong disapproval of the state preventing people with genetic diseases from reproducing. Perhaps the logic is something like a natural rights theory of property: I have produced that child, she of my genetic material, you cannot raise her in a Platonic (Huxleyan?) state institution. This doesn’t really make sense, though; no one considers children to be actual property, not even Locke. The difference between birth and adoption seems more one of intuition than substance. Children who remain with their birth parents are no more immune to mistreatment than are adopted children.

Both demand to adopt and the number of children waiting to be adopted remain high. The stumbling block appears to be government regulation. The adoption process is notoriously slow, with a minimum time frame of six months; some families wait four to eight years to adopt. Part of this may be that direct adoption is banned except in cases where adopter and adoptee are related, and that extensive background checks and court dates are required before an adoption can go through.

Does it seem like someone with a child sex offence conviction should be able to adopt young children? Absolutely not. At the same time, allowing children to languish in foster care for years while there are plenty of reliable, caring people who would love to adopt them seems bizarre and cruel. The current system demands liberalisation. Might pregnant women be allowed to choose adopters? Might adopters be allowed to pay to adopt? A lot to think about, to be sure.

Reform of the NHS fails again

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“Another reorganisation involving unhappy managers can only worsen the service.” So said a British Medical Journal editorial in 2001. Thanks to the Lib Dems reneging on their own manifesto, the opportunity to streamline the NHS is being thrown away.

Before Andrew Lansley allowed himself to be compromised into a huge and complex Health Bill, the issue was quite simple. The £20bn available from removing unproductive strategic authorities and primary care trusts (PCTs) would be handed to GPs to be spent on patient care. If the GPs thought they needed more managerial support, it would have to come out of their own budgets. The social care part of the PCTs’ activities was less well thought out but the same logic could have been followed with local authorities.

The role of government would just be to divvy up the available budget between GP practices, and local authorities. The GPs pay the hospitals and other health suppliers. The main reason, probably, why GPs object is that they, rather than faceless bureaucrats, will have to conduct the rationing process. We know that NHS demand will grow and so will the cost of treatment. Rationing is inevitable and will increase. GPs do not wish to take the blame.

Once the government accepted the arguments for GP practices combining and setting up commissioning bodies, i.e. mini-PCTs, involving other interested, but unaccountable, interests and “Patients’ Panels” all the savings were lost. Doctors will again be locked in endless committee meetings when they should be seeing patients.

The PCT managers in my county (Norfolk) are rubbing their hands with glee. The day they receive their redundancy cheques is the day they all start work with the new mini-PCTs. And more managerial jobs will be available, pushing up salaries, than there are today.

Norfolk used to have four PCTs which was considered inefficient and reduced to one. It is hard to see how having tens of mini-PCTs will be any better. And this is where we came in: every £1 spent on bureaucracy is £1 less on patient care.

Adam Smith's Birthday

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adamsmith

It's Adam Smith's birthday today. Well, probably. We know that he was baptised on 5th June 1723 – which, because of the calendar change in 1752 translates to 16th June today. And generally, children in Fife would be baptised a couple of days after they were born, so it's a fair bet that today is his birthday.

Smith was, of course, the moral philosopher who made his name with The Theory of Moral Sentiments, which brought what we would now call an evolutionary approach to ethics. His view was that nature has endowed us with empathetic feelings towards other people – which is just as well, because we could not live and co-operate without it. The book was such a success that he was hired as the personal tutor to a senior Scottish nobleman, and on their educational tour of Europe, Smith started work on his other great book, The Wealth of Nations. That too was a hugely important book, which led to the sweeping away of trade barriers, official monopolies, and tax complexities and, arguably, set the foundation for the free-trade era of the nineteenth century.

As usual, the Adam Smith Institute will be celebrating with Adam Smith's favourite food, strawberries. And maybe some cake and claret.