Why we want to break up the NHS

The National Health Service is, or at least was, a near monopoly. Monopolies are a bad thing and therefore we want to break up the monopoly.

However, there's long been a school of thought that says that monopolies, while they might not be positively good things, aren't actually all that bad. It might be acceptable to have the teensie, tiny, costs of monopoly if there is some over-arching reason to do so. Like, for example, the much vaunted "fairness" of equally bad access to healthcare for all. This argument rests on the costs of monopoly being teensie. They ain't:

This paper reports on a new literature that takes a different approach to the costs of monopoly. It examines the costs of monopoly and tariffs within industries. In particular, it examines the histories of industries in which a monopoly is destroyed (or tariffs greatly reduced) and the industry transitions quickly from monopoly to competition. If there are costs of monopoly and high tariffs within industries, it should be possible to see those costs whittled away as the monopoly is destroyed. In contrast to the prevailing consensus, this new research has identified significant costs of monopoly. Monopoly (and high tariffs) is shown to significantly lower productivity within establishments. It also leads to missallocation within industries: Resources are transferred from high- to low-productivity establishments.

Thus we want to break up the monopoly. Indeed, we've seen evidence of rising productivity as a result of the limited competition already extant. Two data points: NHS England had limited competition between establishments while NHS Scotland and Wales did not. Productivity (ie, amount of treatment, number of treatments and quality of treatments for the same money) rose in NHS England in a way that they did not in Wales or Scotland. Secondly, we found that when limited competition (on quality not price grounds) was introduced in NHS England that those areas with more competition increased productivity (same measure, more and better treatment for same cost) more than those areas with less.

New theory tells us that monopoly is worse for productivity than we had thought. If this were so then relaxing the monopoly should result in an increase in productivity. We have so relaxed and we are seeing increases in productivity. Thus we desire to relax the monopoly.

None of this stops the tax financing of at least some health care of course. It is only an argument about the mechanism by which the actual service is delivered: not by a monopoly please.

This is just too delicious for words

So, they've finally nailed one of the bankers, fined him and banned him from The City.

Peter Cummings, the HBOS banker whose division lent billions of pounds to property developers, has been given a lifetime ban by the Financial Services Authority for his role in the banking crisis. Cummings, who has also been fined £500,000, is the only former HBOS banker to be penalised by the City regulator as a result of the near-collapse of the bank which was rescued by Lloyds in September 2008 - and the highest profile banker to be punished since the financial crisis.

I find this all just too delicious for words.

Let's just potter through the standard critique of The City and banking shall we?

Everyone was too committed to trading and products rather than relationships. Too much investment banking and not enough commercial banking. Exotic products and derivatives rather than proper loans to real businesses. Even, not enough real investment, only loans.

We're told that the answer to all of these problems is to divorce investment from commercial banking. To tax, with the Robin Hood Tax, that socially useless trading. To reduce the productisation of things and to go back to relationship banking. To encourage banks to provide real capital, equity, not just debt and loans.

I'm not being unfair here, am I? This is generally the current received wisdom, yes?

So, which banker do we actually fine and ban from The City? The one who used no derivatives. Did not do any trading. Was a straight commercial banker, nothing to do with the socially useless stuff at all. Who invested in real companies making real product. Who was willing to invest equity as well as just provide debt finance. Whose activities would not have been affected for one moment by a Robin Hood Tax.

One of these three things has to be wrong. The initial analysis of the basic problem, the solution to that perceived problem or the bloke we've dumped the blame upon.

Unless, that is, we English are even better at irony than our global reputation already suggests. Punishing the guy who did what everyone says all bankers should now just do is irony, isn't it?

Review: Taft 2012, by Jason Heller

Two things did I know about William Howard Taft before reading this book. Firstly, in 1903, as governor of the Philippines, he opposed a ban on the sale of opium. Secondly, in 1913, as  the 27th president of the USA, he vetoed the Webb-Kenyon Act which would have banned the transportation of alcohol from into dry states. A liberal man in age of puritanism, Taft’s resistance was in vain. Opium was banned in the Philippines in 1908 and the Senate overrode his veto of Webb-Kenyon Act, paving the way for national prohibition followed seven years later.

After reading this novel, Jason Heller’s first, I am not sure I know much more about this one-term president. He was a fat man, that much is amply emphasised. He had a moustache, like so did many gentlemen of the Gilded Age. And he would have fitted into the world of 2012 with surprising ease.

Taft died in 1930 in the bosom of his family, but that was only in real life. In ‘Taft 2012’, he mysteriously disappeared in 1913 and reappeared still more mysteriously in November 2011, just in time to bring some traditional American values to the current presidential election. His re-emergence leads to some inevitable fish-out-of-water confusions from the Crocodile Dundee school of comedy. There are various battles with technology, which Taft wins with remarkable ease for a man of 155. He enjoys some punk rock. He is unfazed by his descendent marrying a black man. He is soundly opposed to the War on Drugs.

Heller sees Taft’s main attribute as being his reluctance to hold political office. He may be right, but even if not wanting to be president is an excellent qualification for the job, having no policies is not, and Heller’s Taft has little of substance to say. He is neither appalled nor delighted to see what has happened to his country. He is just a bit confused, an affable man who is out of his depth and knows it. He sees no reason why he should run as president in 2012, and the reader has to agree, but the invitations rain in nonetheless. Thanks to the internet, a minor movement of ‘Tafties’ attempts to goad him back towards the White House. Heller’s depiction of the madness of the Twitter crowd is well-observed, gently parodying the shallowness of the medium while showing Taft to be just another celebrity freak on the social networking conveyor belt.

It may be churlish to lay the charge of unrealism at a time travel yarn, but the ease with Taft fits into modern day liberal America strains credibility. This would matter less if the novel had the teeth to fulfill its promise. Instead, it is a political satire with very little satire and hardly any politics. Taft has nothing of significance to say about American foreign policy, abortion, Obamacare, the economy or how to reunite a divided country. He is an everyman with enough wisdom to know that he doesn’t have the answers, but his reluctance to stir things up wastes an interesting premise. Heller clearly sees Taft as the kind of middle ground, third way candidate his country supposedly needs. He is, as his fictional grand-daughter tells him, “conservative yet forward-thinking, pro-business yet pro-regulation, principled yet open to compromise”, but which politician does not describe themselves in these bland terms? Certainly not Mitt Romney.

The closing pages see something of a twist in the tale, but the target Heller takes aim at is too trivial to justify the effort of resurrecting a dead president, as if Churchill came back from the dead to complain about chewing gum. In the end, Taft 2012 is a perfectly enjoyable bit of fun which is as disposable as its title destines it to be.

The QE3 fantasy

The monetary authorities are at it again – trying to defy reality. In Europe, the ECB has thought up a new wheeze, called Outright Monetary Transactions, by which they can buy up the debts of bankrupt eurozone countries without (they hope) causing too much grumbling among the Germans who will ultimately pay for it. In the US, the Fed has just announced a new quantitative easing (QE3) plan to buy up mortgage debts in order to keep long-term interest rates down and make homeowners happy – well, as happy as they could be after a 20%-30% slide in the value of their properties.

Lots of economists are popping up on TV screens in Europe and America to say how wise these new moves are. Well they would, wouldn't they? Most economists work for banks and big companies or big financial firms. All this new government money is very welcome in such quarters. It goes directly into bidding up the price of financial assets, mortgages and shares, including the shares of the banks themselves.

I supported the early rounds of QE on good monetarist grounds. It is one of the oddities of fractional reserve banking that banks can actually create money. At the stroke of a pen, they can create loans that their customers then deposit in other banks, allowing those banks to create more loans...and so on. During the financial crash, the banks were caught like rabbits in the headlights, and clamped down on their lending. The politicians and regulatory authorities added to the contraction, telling the banks not to make so many risky bets. As a result the amount of money around fell sharply. But money affects everything in the exchange economy: it is critically important, and you do not want to see it falling sharply like that. So the Bank of England needed to fill the gap. As long as the Bank is prepared to cut back sharply again, should the economy start booming once more (though the chance of a rapid bounce-back seems to be receding somewhat).

The Fed's latest $40bn-a-month boost to the mortgage market is just a fraction of its earlier monetary boost, of course. So whatever good or harm it will do might be limited. But what exactly is it intended to do? The effect, of course, will be to keep down long-term interest rates, which  one might hope makes life easier for businesses that want to invest and grow. But the immediate and strongest effect will be to shore up the US housing market, and making it easier for people to get housing loans and buy houses. Wait a minute, though...is that not exactly the thing – or at least, a large part of the thing – that got us into this mess in the first place? Cheap credit that encouraged people to borrow more than they could afford and boost house prices beyond any commonsense level? When are our authorities actually going to face reality?

Democracy must restrain the mob against the minority

More e-petitions will get written responses form the government, the Commons leader Andrew Lansley has announced. Any petition signed by more than 10,000 people, he says, will have a government response published alongside it. Well fine, for all the difference that is going to make.

There are three dozen petitions around that would qualify for such an official response, ranging from the culling of birds of prey to granting a pardon for Enigma codebreaker Alan Turing. But there are also a few joke ones, or perhaps barbed ones, like the petition calling for Mrs Thatcher's state funeral (when it happens) to be privatized. Very droll. But is it the sort of thing that parliamentarians should be racking its brains to respond to?

Petitions, like referendums, are a tricky constitutional issue. Yes, we want the public to be expressing their views strongly, and as Daniel Hannan and Douglas Carswell say in their excellent book The Plan and other articles on opening up our system of government, it is right that Parliament should debate things that the public feel are important, rather than just things that the party leaderships think important. It makes our MPs recognise, once again, who they work for – not who doles them out ministerial jobs. So yes, peitions getting lots of signatures deserve some response and those with overwhelming support should be debated.

But we should not conclude from this that we should be governed by petitions. Nor even referendums.

Our representative system is a system of balances, albeit a rather creaky one. That is why we have two chambers of Parliament – so no dominant majority in the House of Commons can get its way. Not all the time, at least. As James Buchanan and Gordon Tullock showed in The Calculus of Consent, to impose your will on the public, all you need to do is to win 51% of the votes in 51% of the constituencies. So that's about a quarter of the population. Actually it is less, because only about half the population will probably vote anyway. So if there is just one chamber of Parliament, it is possible for quite small majorities to dominate the agenda. That is why we have such absurdly high tax on businesses and on people who earn a lot by creating jobs and prosperity. There are simply fewer of them than the majority, who enjoy the benefits of the taxation. Splitting the power with a second chamber, and indeed the Supreme Court, reduces that risk of the minority being exploited by the majority. Well, it reduces it a bit.

As Buchanan and Tullock suggested, and as I recounted in my recent book Public Choice – A Primer, we need strong constitutional arrangements to prevent this kind of exploitation. The US constitution managed to contain it for quite a time, but now it is hardly up to the job. As government has grown, the benefits of controlling the government – the amount you can loot from exploiting the minority – has grown too. So controlling governments has become big business. Ask any lobbyist. We need, in fact, surprisingly strong constitutional arrangements if we are to prevent the tyranny of the majority.

Am I in favour of democracy? Of course I am, but like the market economy, democracy only works if it is constrained by a set of rules. You need a fire basket to contain the fire. Without the rules of honesty, contract and private property, the market will soon descent into crony capitalism, with governments dishing out favours to their friends. Without constitutional rules to prevent minorities being exploited by majorities, democracy will turn into mere majoritarian populism, or into rotating elected dictatorships. Some people say this has already happened.

The results are in: Spending cuts, not tax hikes, are the road to recovery

Vuk Vukovic draws on new academic research to argue that the historical evidence around recessions is clear: cutting government spending, not Keynesian stimulus, is the way to create a recovery.

A new research paper by Alesina, Favero and Giavazzi focuses on measuring the output effect of fiscal consolidations. The idea is that fiscal consolidations tend to have much more favourable effects on the economy if they are done via spending cuts alone, not via increased taxation (see the graph below), which is actually what austerity is supposed to be.

Here's the abstract:

"This paper studies whether fiscal corrections cause large output losses. We find that it matters crucially how the fiscal correction occurs. Adjustments based upon spending cuts are much less costly in terms of output losses than tax-based ones. Spending-based adjustments have been associated with mild and short-lived recessions, in many cases with no recession at all. Tax-based adjustments have been associated with prolonged and deep recessions.” (Alesina, Favero, Giavazzi (2012) "The output effect of fiscal consolidations" Figure 3, pg. 40.)

Continue reading.

Miles Saltiel

Miles Saltiel is the CEO of the Fourth Phoenix Company which provides policy, research and associated services to banks, industry and others. His recent publications include Seeing the wood for the trees, which evaluated the Forestry Commission’s place in modern Britain; The revenue and growth effects of Britain’s high taxes, (with Peter Young), which presented cross-country and cross-period analyses of tax reform; Bank regulation: can we trust the Vickers report? (with Tim Ambler), which analysed the report of the Independent Banking Commission and made counter-proposals; On borrowed time, which argued for the reform of “age-related” expenditures to relieve otherwise insupportable fiscal pressure; and No reason to flinch, which argued against insulating the NHS from reform by comparing it to equivalent regimes internationally.

Miles read PPE at Oxford and wrote his MA dissertation on Japanese business and government at Sussex. In 1979, he joined GEC-Marconi, working in corporate finance and recoveries, to become no. 2 in Marconi Projects. In 1986 he went into investment banking, joining the WestLB Group in 1996 as Head of Equity Research, Emerging Markets. In 1998, he assumed responsibility for London-based Tech Research, and in 2000 was voted one of the UK’s top 50 in the New Economy, in 2002 becoming the senior tech banker at the WestLB group.

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Helping entrepreneurs to help us

On Tuesday, while Vince Cable was advocating government direction of the economy, I was speaking at a Royal Society for the Arts workshop devoted to young entrepreneurs.  The RSA published poll figures showing that large numbers of young people aspire to run their own businesses.  This is in line with our own findings, first with a poll of the Millennial Generation, and more recently with a poll about the nanny state.  In both we found that nearly half of young persons would like to run their own business at some stage.

I pointed to three obstacles.  First there are planning laws that act against building up a business from domestic premises.  Then there are the regulations and liabilities imposed on employment, including PAYE, NIC, maternity leave, sick pay, holiday pay, protection of employment, and so on.  Added to these are the regulations on health and safety and the paperwork that has to be filed.  Thirdly, I pointed to taxes on business which are high enough to act as a disincentive, given the risks involved.

I suggested that each could be redressed.  A five year 'holiday' could exempt start-ups from the regulations which otherwise apply to business premises.  And if all employees of small firms could be treated as self-employed, most of the employment regulations would not apply, nor would the obligation to fill in the paperwork pertaining to them. 

Finally I suggested a version of the German law that allows people to earn up to 400 euros a month from part time jobs without being taxed on it.  People are allowed to take on more than one such job, provided they are with different employers.  In Germany these laws halved youth unemployment and created 500,000 new such jobs in their first year.

My contention is that these would clear space into which young entrepreneurs could move in large numbers, creating between them the growth agenda that has to accompany fiscal responsibility, and would do it far more effectively than the many-times-discredited approach of Vince Cable.

The results are in: Spending cuts, not tax hikes, are the road to recovery

A new research paper by Alesina, Favero and Giavazzi focuses on measuring the output effect of fiscal consolidations. The idea is that fiscal consolidations tend to have much more favourable effects on the economy if they are done via spending cuts alone, not via increased taxation (see the graph below), which is actually what austerity is supposed to be.

Here's the abstract:

"This paper studies whether fiscal corrections cause large output losses. We find that it matters crucially how the fiscal correction occurs. Adjustments based upon spending cuts are much less costly in terms of output losses than tax-based ones. Spending-based adjustments have been associated with mild and short-lived recessions, in many cases with no recession at all. Tax-based adjustments have been associated with prolonged and deep recessions.” (Alesina, Favero, Giavazzi (2012) "The output effect of fiscal consolidations" Figure 3, pg. 40.)

 Tax-based (RED) and Expenditure-based (BLUE) adjustment

The figure shows the results they got when comparing tax-based and expenditure-based fiscal consolidations, using a sample of 17 OECD economies, over 25 years (1980-2005). It is clear that for every country in the sample, tax increases resulted in a negative or stagnant output, whereas expenditure cuts resulted in an increase of output two years after the adjustment.

They have also found (not shown in the graphs) that business confidence picks up immediately after the expenditure-based adjustments, unlike consumer confidence for which it takes longer to recover. Finally, the most important finding, in my opinion, is that the "heterogeneity in the effects of the two types of fiscal adjustments is mainly due to the response of private investment, rather than that to consumption growth". This means that private investments tend to drive recoveries, not consumption as the Keynesians would claim.

The findings of the paper are important in trying to explain the process of "right" or "wrong" fiscal adjustments. Using an increased taxation burden combined with spending cuts is a wrong approach since it depresses the economy temporarily (loss of public sector jobs leads to a loss of consumption before these people are reemployed), but fails to offer incentives for it to grow. All the laid off public sector workers that are supposed to find jobs in the private sector are unable to do so since the private sector isn't hiring due to the many existing constraints it is facing.

Unemployment starts to go up, supported by an increasing number of graduating youths for whom finding a job is now even more difficult, making the situation look bad for the politicians in power. This means that the politicians, still under pressure to close the budget deficit, now need to cease spending cuts and stop firing more civil servants and bureaucrats, since they don't want to make the unemployment picture even worse than it already is. So the government then relaxes the spending cuts and public sector reforms and focuses mostly on increasing taxes to close the budget deficit. The government starts running out of options, as further spending cuts become politically unfavourable while increased taxation is needed to continue closing the budget deficit.

Are public investments the key to recovery?

This got me thinking further on one of the most popular policies aimed at kick-starting a recovery, one that is especially being advocated in the UK - infrastructure spending. The idea is as follows: the government is suppose to kick-start growth via infrastructure spending by two ways; (1) directly creating jobs, and (2) cutting costs to businesses through improved infrastructure.

The first idea implies that hiring more workers in construction, who will use their new wages to increase spending, will ultimately boost consumption (the classical demand-side story, followed by a Keynesian government spending multiplier). However, if the idea is to hire more workers to start a demand-side increase in consumption, why not have the government hire 100,000 workers (or more), give them all a job to dig holes around the country, and then fill them up? That's a perfectly meaningless job, but as long as the workers get paid, they will begin the cycle of recovery, right? Wrong! Modern consumption theory teaches us that expectations of temporary income aren't the same as expectations of permanent income.

If people anticipate a rise in income, tax rebates or any other form of stimuli (this is true for companies as well, not just consumers) to be temporary, they will save this money instead of spend or invest it. But when they anticipate a permanent rise in income (like getting a new or better paid job) they are much more likely to spend or invest now as they anticipate a certain future stream of income.

The second way is having the newly build infrastructure lower the costs of businesses and help them grow. But how long does it take to build major infrastructure projects like motorways or railways? A long time! Much longer than the average bankruptcy rate for businesses in the UK. And much longer than the current recovery is going to last (hopefully). Full benefits won't be visible in another 10 years, during which time the very same businesses advocating the project will be using old roads and old railways.

This isn't to say that infrastructure projects aren't important - they are, for long term growth almost definitely, but they cannot be the priority in starting up a recovery. One can argue that major infrastructure projects and things like the New Deal made a big difference during the Great Depression, but the world is much different today than it was 80 years ago. For starters back then information was being distributed either through the radio or word of mouth. In that case the people hearing that the government is ready to do something to help them out was enough to get confidence going. Their knowledge of possible negative effects on public finances was very limited. In the modern age of vast informational availability this is certainly not the case anymore. Particularly among investors, but that's another story.

To start up a recovery, the priority should be on supply-side reforms aimed primarily at resolving labour market inefficiencies and at reducing the regulatory and taxation burden on businesses. These will decrease costs much faster and much more efficient than any new road or rail-link, no matter how good or fast they could be.

No, Brendan Barber, the economy is not a sporting event

TUC leader Brendan Barber has jumped on the back of Olympic glory to make a strange analogy about the Games and how we should run the economy. He criticises the notion that private is better than public spending and that the market will deliver better than government by pointing at the success of the publicly funded and organised Olympic and Paralympic games, just ahead of the TUC’s annual Congress.

Of course, the function of the Olympic Games was to provide entertainment. Some may argue that it will boost tourism and (temporary) employment but, essentially, it is a sporting event. If we were to run the country like the Olympics, we would produce a society in which wage values would be polarised between very high achievers (the Usain Bolts and Jessica Ennises) and the very low earners (the many, many amateur athletes that do not manage to make it to the Olympics). This is precisely the wage differentiation that the TUC campaign against.

Barber ridicules the fact that government claim they "can’t pick winners" when helping companies adding, ‘Tell that to Bradley [Wiggins], Jessica [Ennis] and Mo [Farah], all supported by targeted funding.’ What he is missing in this comparison is the essential difference between athletes and companies, which is one of function. An athlete can certainly be targeted by funding, as they have only one function, easily and objectively measured. For example, the target of funding for a 100 metre runner would be whoever can run 100 metres in the fastest time, while the target of funding for a high jumper would be whoever can jump the highest and so on. Simple.

When governments target spending towards companies however, they are essentially saying: the products and services this company provides are what people will want and all alternative products and services are inferior. By ‘picking winners’, companies compete for government investment as opposed to consumer spending. The great thing about letting the markets decide is that it is, in a sense, democratic; it lets people vote with their money, creating a fluid and representative selection of what the entirety of society actually want and allowing those areas to develop and become more accessible.

Barber goes on: ‘Markets always trump planning, they say. Well look at the Olympic Park, the result of years of careful planning and public investment.’ He says look at the Olympic Park, well I say look at Concorde, British Leyland, the Millennium Dome, the Channel Tunnel, and so on. All government investments that overshot costs and timescales and were grossly inefficient. The taxpayer underwrites the risk of government investment and it is they that have to foot the bill when things go wrong.

Economic activity and investment in certain industries in London and the surrounding areas have been boosted (at least temporarily) by the Games, but to the detriment of those living everywhere else whose income was diverted through taxation to fund it. This may be regarded as an acceptable loss by many because of the entertainment value provided, but is it right that even those who have no interest in the events should be made to pay? Central planning means that your income is diverted towards things that may not be in your best interest and often in a way that is too inefficient to justify the collective good rationale.

Finally: ‘Private is always better than public, they argue. Not true, as we saw all too clearly when it came to Olympic security.’ G4S remember was the choice of government with the backing of the public purse; it should have been up to them as investors to ensure that the security company was up to the task, something a well run private organisation would have been sure to do. Even if we disregard this fact, the Olympic games took place over a matter of weeks, while the market has been in existence for thousands of years.

Markets learn and adapt to needs and preferences, removing underperforming businesses and rewarding those that provide the desired service at the cheapest cost (unless of course there is government interference). Unlike the targets of government spending, companies within a free market system that do not provide the products and services desired of it better than their competitors can are allowed to fail, while better and more efficient ones take the lead. Competition induces progress, forced monopoly results in stagnation.

Perhaps Brendan Barber realises the fallacies of the arguments he is making, but think they can win him favour simply by allying him to the ‘Olympic spirit’, implicitly setting his opponents against it. However, the economy is not a sporting event, it cannot be run like the Olympic Games and nor should it.