Tinkering with defence

The House of Commons Defence Select Committee published its report “Gambling on ‘Efficiency’: Defence Acquisition and Procurement" on 14th December.  It notes that the MoD is trying to live well beyond its means and doubts that the future efficiencies promised by the MoD to narrow the gap will be realized.  So far, so correct.  The report makes ten recommendations, sensible in themselves perhaps, but none resolve the strategic issues.

The ten recommendations can be summarized as:

1. The MoD should provide us the criteria to assess the effectiveness of “Defence Equipment and Support” (DE&S) which is currently seen as failing.

2. The Chief Executive of DE&S left after two years.  An interim should be appointed urgently and the proposed appointee interviewed by the Select Committee.

3. The MoD should review its efficiency plans and contingencies.

4. The MoD should publish an ‘efficiency tracker’ which would detail when, where and how efficiencies are to be made, together with risks and contingency plans.

5. The role of Single Source Regulations Office (SSRO) to ensure the MoD’s contractors make enough money (currently >10%) when procurement is not made competitively on the open market: the SSRO’s scope should be extended to government-to-government contracts and any single source contracts, save in exceptional circumstances.

6. The SSRO must also be given similar powers to those of other regulators.

7. To serve as a fully-fledged regulator, rather than just as a unit to assist the MoD, its personnel must be chosen, and its funds provided, independently of the MoD. Proposed appointees to the Chair and the Chief Executive positions should be interviewed by the Select Committee.

8. Those updating the defence industrial policy should consider adopting a broader definition of ‘value for money’ that incorporates the impact of major defence projects on local economies, skills and employment levels.

9. The new defence industrial policy should emphasise the importance of a regular drumbeat of activity to sustain a successful and high-skilled work force and to maintain the UK’s sovereign capabilities. It should also look at the types and quantity of defence equipment that are currently sourced externally, with a view to identifying where such equipment could be sourced domestically.

10. The Government should commit to spend at least 2% of the defence budget on science and technology.

There are key strategic issues lying behind this report including: how the MoD can live within its means; how the MoD will deliver the efficiencies it claims it will make by cutting the tail and not the teeth of the armed forces and their essential suppliers; how to get better bangs for the bucks by sourcing from the competitive market, without decimating the UK’s defence industry needed for national security; and how to stop senior officers and civil servants commissioning distant future contracts which will be unaffordable when the bills roll in and they themselves have moved on.

To what extent do the Select Committee’s recommendations address those issues?

The first two are practical housekeeping for the DE&S.  Interviewing the sole nominated candidate is a bit late in the process.  The MoD will simply “take note” of any concerns.  Better to establish consensus sooner with the MoD and headhunter.

I am no prophet but I am willing to bet that the MoD will conclude its review of its own plans (recommendation 3) by finding them wholly admirable.  It would be better to have them exposed to the light of day, independently assessed and (recommendation 4) tracked.

Recommendations 5 – 7 concern the SSRO which is an extraordinary beast designed, it would seem, to featherbed the British defence industry at the expense of the taxpayer and more or less guarantee the MoD will overspend its budget.  These recommendations exacerbate the problem but do contain a valuable kernel.  Within the SSRO is the Investment Approvals Committee (IAC) whose role is to challenge non-competitive procurement.  If it worked, it would make a sizeable dent in the MoD’s overspend. The reality is, as the Select Committee points out, that the MoD has rendered it entirely ineffective.  For example, on all 14 occasions (out of a total of 166 decisions made between January 2015 – September 2017) where the IAC challenged the decisions to make non-competitive contracts, they were told it was too late as commitments had already been made (those interested should read the full report Improving value for money in non-competitive procurement of defence equipment produced by the National Audit Office in October).

The solution is not to give SSRO powers similar to unspecified regulators, some of whom are less than effective, but to transfer the IAC to the Treasury and make its pre-agreement to bespoke procurement mandatory.

“Value for money” (recommendations 8 and 9) should mean the impact on cost/effectiveness of our armed forces. Watering it down to incorporate “the impact of major defence projects on local economies, skills and employment levels” would mean, for example, that the UK production of rifles was good value for money, even though they did not work, if it provided employment in Huddersfield. Most soldiers would be able to express an opinion on that.  The Select Committee’s intent could be met by requiring the IAC to take the wider UK economic considerations into account.

Finally, recommendation 10, which may well be a good idea, is not relevant to the topic of the paper.

In conclusion, the strategic issues do need to be addressed head on. There are a few points that the government could start with:

• It is already policy, albeit not implemented, to use the competitive market for procurement wherever possible. More could be done to focus resources on lower cost, but more often used. armed forces such as the infantry which are engaged almost every year. Only one non-ballistic submarine, by contrast, has seen action in the last 70 years. 
• The MoD should publish the efficiencies it claims it will make, open them to criticism and, as the Select Committee suggests, progress each year against that plan.
• Inter-service rivalry contributes to the commissioning of what might be considered vanity projects.  There is a belief, correct or otherwise, that the army is down-sized as a result. We need a fully independent (of the MoD) IAC. The spending options and their relative values for money should be transparent, at least to the Select Committee. The UK defence industry has to be brought up to world standards so that it can win competitively.  Featherbedding only worsens its long-term prospects.
• Senior officers and civil servants do not intentionally over-commit the future. The problem is partly that the commissioners are each deeply engaged in their own projects and the MoD does not seem capable of scheduling and adding up the likely year-by-year total bill for the ten or even twenty years ahead. As responsibility moves over that time period and new options arise, specifications keep changing. Anyone who has had a house built knows how expensive it is to change specifications. The IAC’s role should be expanded to monitor the overall management of these future commitments and, in conjunction with the NAO occasionally, report annually to the Treasury, the MoD and the Select Committee.

Defence procurement has been a mess since the MoD was founded in 1947. Numerous consultants have advised numerous changes but the fundamental strategic issues have remained much the same. Last week’s Select Committee report is welcome but it does not go far enough.

This is a therefore about wages, not a but

We wonder, what does anyone think is going to happen in such circumstances? 

Cost of hiring a worker shoots up – but pay packets barely budge 

We do understand that the Telegraph doesn't have subeditors any more but really:

Companies are shelling out extra cash to take on more workers, but little of the money is finding its way into wage packets.

Wage costs in the three months to September were up by 2.6pc on the year but other costs of employing workers were up by 6pc, the Office for National Statistics said. 

Those other costs include pension contributions, national insurance, sickness payments, maternity and paternity pay and other benefits.

Auto-enrolment pensions are one possible contributor to the rise.

The important number to the employer is "What is the cost of hiring someone?" As a first order approximation they care not how that is divided between wages, taxes upon wages, other parts of total compensation and so on. They're interested in how much it costs to get a warm body in to do the work, that's all.

So, if the costs of doing that rise employers are seeing a rise in employment costs. They might even be entirely willing to pay more to get the workers they want. But if that rise is coming in non-wage compensation then there's no more money left over to raise the wages, is there? 

So, why do we have as close as modern times has ever come to full employment, economic growth and little to nothing in the manner of wage rises? Because government is forcing up the non-wage costs of employing someone. Hey, maybe it's even true that this all *should* be happening, perhaps everyone really should be saving for a pension, perhaps the maw of the State needs feeding with more employment taxation.

It is still true though that this is a therefore, not a but. Non-wage costs of employment are rising therefore wages aren't.

It's not just what they do, it's how badly they do it

The government has decided to treat us to a listing of fat cats. This is, as is obvious, a basic error. For this is being advanced as a fault of capitalism, that those running businesses get paid large amounts. Quite why it is a failure of capitalism that workers with rare skills get highly paid is not explained. We tend to think that the workers, even if they have been hired to organise matters as bosses, get well paid is a feature, not a fault, of an economic system.

But it's not just what is being done, it is the manner as well. For the definition of who is on this little list is absurd:

Several of Britain’s best-known companies, including Burberry, Sky and Sports Direct, are included on a list ordered by the prime minister of firms rewarding bosses with “fat cat pay” and representing the “unacceptable face of capitalism”.

More than a fifth of Britain’s FTSE listed-firms are included on the “name and shame” register of companies that Theresa May said risk damaging “the social fabric of our country” by paying bosses too much money.

No, not really:

The public register was published on Tuesday by the Investment Association, a trade body of investment firms that manage the pensions of million of Britons.

The register lists every company in the FTSE All-Share Index which has suffered at least a 20% shareholder rebellion against proposals for executives pay, re-election of directors or other resolution at their shareholder meetings.

It's a list of those who haven't been listening to shareholder concern over pay. That is really something rather different, isn't it?

 The public register, which will be continuously updated, also includes companies that withdrew or amended pay packages in the wake of shareholder discontent in the run up to votes.

What? Well, yes:

Companies on the register include:

Sports Direct

More than 70% of independent shareholders voted against a proposed £11m payout to founder Mike Ashley’s brother, John. The payment was blocked and the company said it now “considers all these matters to be closed”.

We have a list of companies that don't listen to their shareholders. On it we include those who do listen to their shareholders.

Let's face it folks, if this were a racehorse we'd already have boiled it down for glue. And this is, by the time you read this, only Day Two of our little list. Government, bad ideas incompetently applied.

Parting thoughts

Today is my last day as Executive Director of the Adam Smith Institute. I joined back in 2010 at a junior level, helping out with the research. Over the years was able to rise up the ranks and help to shape the Institute’s research and overall mission.

It’s a bittersweet day for me. I’m enormously proud of the things I’ve helped to achieve here, and especially of the teams I’ve been able to build. I hope you won’t mind indulging me in some memories of my time here.

When I started, the team of Tom Clougherty, Sally Yarrow and Philip Salter mentored and encouraged me, giving me chances to go on media and write for national newspapers that few other 22 year olds will get. Those early days especially were a time when my confidence grew and grew. The fact that people as smart and capable of that, who I liked and respected so much, saw something of value in me gave me encouragement and a feeling that I could make something valuable of myself.

After they left, and the period of interregnum that followed (made manageable thanks to the enormous talent and hard work of JP Floru and Peter Spence, who went on to a successful career in journalism), we had to rebuild. Our first hire, from City AM, was Ben Southwood. Ben is the reason that the modern ASI is what it is – anti-dogmatic, curious, and iconoclastic. You simply cannot be an ideologue around Ben. He is too smart and too intolerant of bullshit to let it happen. I try to be as open-minded, flexible and reasonable as possible – to the extent that I am, it is largely thanks to Ben. His influence on the Institute is less visible than mine, but it is absolutely equal to mine. He deserves to be known as the person responsible more than anyone else for bringing rigour and intellectual curiosity back to the British free market movement.

With our first generation team under my leadership, made up of Ben, Charlotte Bowyer, Kate Andrews, Nick Partington and Sophie Sandor, we helped to rebuild the Institute and restore the ASI’s place in the political landscape. Those were scrappy days of long internal debates and risk-taking, as we tried to re-direct the Institute to be something relevant and exciting again, and show our own personalities in its work. Kate’s star continues to shine, as befits one of the best communicators of ideas in the British liberal movement. Charlotte’s talents, more than anyone else I’ve worked with, reflect what I like to see as my own – an enthusiasm for every challenge, and an ability to cut to the facts and through the rhetoric in political debate.

Some of the best memories I have of those days are our trip to Hong Kong, our shared love of PC Music and Carly Rae Jepsen, and the evenings we spent trying out new restaurants together. I’m amazingly proud of that team and how much we were able to achieve. It was because we were some of each other’s closest friends that we managed to do so much with so little.

As some of those staffers left, new ones joined. Sam Dumitriu, Flora Laven-Morris, Holly McKay and Hunter Georgeson helped to turn a think tank that was back on its feet into one that was running at full pace. I remain in awe of Flora’s ability to turn PR lead into gold, and Sam’s ability to master subjects just before they exploded, like electricity regulation and the gig economy. Sam, who will be taking over as Head of Research, is one of the most impressive policy wonks I’ve met at any think tank, and I believe the ASI’s output will reflect his serious, scholarly approach to empirical research.

As the political landscape shifted, we were joined by Daniel Pryor, Matthew Kilcoyne, Amelia Stewart, Oliver Riley and, most recently, Jonas Christiansen. I have known Daniel since he was seventeen and, of all the future stars I’ve come across in the liberal movement, he is one of the brightest. Matthew’s understanding of the political tectonics is unparallelled, and combined with his flair for PR, I believe the ASI’s work will be more influential and more politically relevant than it has been for decades. I am proud to have had a hand in the founding of the Entrepreneurs’ Network, founded by Philip Salter who, along with Sophie Jarvis, has created an important, powerful voice for entrepreneurs that does not just revert to corporatist talking points.

The ASI we’ve tried to build has been one that is self-aware, pragmatic, humane and, above all, interesting. We’ve tried not to just bang the same drum all the time, unless we think it’s a particularly important drum that nobody else is banging. We’ve tried to put new, unusual ideas like NGDP targeting, full expensing, YIMBY housing policies, Japanese-inspired transport policies, and globalist migration policies onto the agenda. In embracing the word ‘neoliberal’, we’ve tried to build a new identity for like-minded people who are sickened by the libertarian flirtation with the alt-right and want to be able to identify themselves as open-minded, liberal believers in the power of markets to improve the human condition. None of these jobs are finished yet, but we’re getting there. I’m proud to have had a hand in that.

Finally, the two people who made all of this, the best years of my life to date, possible – Madsen and Eamonn. Eamonn was, I once realised, the fourth person I ever followed on Twitter, back when I was a student in Ireland and years before I had set foot inside the Adam Smith Institute. The enormous respect that Eamonn commands across the world is well-deserved, not just because of his huge contributions to the political and intellectual landscape but because of his generosity of time and spirit. Eamonn will speak to anyone, and give time to everyone, as an equal. To be treated in such a way by such a giant is an awesome experience. All who have met him will know what I mean. 

And Madsen. Madsen defines the ASI and changes the lives of so many of those who come to know him. His sense of mischief and his brilliant mind together make him a force of nature. Throughout the last seven years he has mentored and challenged me. I have “downloaded his software” on so many fronts that I find myself approaching my days with the same determination to change the world and confidence in my own ability to do so that I feel that nearly anything is possible. As I take the next steps in my life, his motto will always stay in my mind: quod tango muto – that which I touch, I change.

Why do people say that hunter gatherers don't work very much?

It's a commonplace these days for people to insist that hunter gatherer societies don't do all that much work.

Questioning the notion that the hunter-gatherer way of life is a “precarious and arduous struggle for existence,” Lee instead described a society of relative comfort and abundance. Lee studied the !Kung of the Dobe area in the Kalahari Desert (also known variously as Bushmen, the San people, or the Ju/’hoansi) and noted that they required only 12 to 19 hours a week to collect all the food they needed.

A couple of reasons why this isn't really very interesting as an observation:

Let us first revisit the !Kung themselves. As Lee himself would later mention in his 1984 book on the Dobe !Kung, his original estimate of 12-19 hours worked per week did not include food processing, tool making, or general housework, and when such activities were included he estimated that the !Kung worked about 40-44 hours per week.

The second being that it's near impossible to have any population density among hunter gatherers. 7 billion people trying to live like that would rapidly be dead as they stripped every living thing, including each other, from the environment.

But another observation.

The average British food budget for a family is some £60 a week. The median full time hourly wage is some £13 or so an hour. Our calculator tells us that this is 5 hours of work a week for the food required. Note well that that is 5 hours work to feed a family, something we can define as the (still, just about) modal four people of two adults and two children, or if preferred, two adults only. Using that latter we work somewhere between one fifth and one tenth of the amount of time hunter gatherers do to fill our bellies.

How the hell does anyone still say that we work more than our ancestors? 

Why complain about capitalists subsidising care homes?

It is entirely true that there are problems in Britain's care homes industry. Government has been eager enough to push up the costs of providing them - those rising minimum and national wages - and somewhat less eager to raise the price paid to cover those wage rises.

Yet it's simply bizarre for people to be complaining about capitalists subsidising the sector.

You would be forgiven for thinking that any connection between wealthy financiers and Four Seasons would involve luxury hotel chains. But last week the relationship of rich investors with a very different type of property has been making headlines. The private equity-owned care home business Four Seasons, which cares for 17,000 older and vulnerable residents, has been teetering on the brink of collapse.

It has been a long time coming: loaded with more than £500m of debt by its owners, its £50m-a-year interest payments have become unsustainable. An 11th-hour intervention from the regulator, the Care Quality Commission (CQC), resulted in an agreement with the hedge fund that owns much of its debt. But how long will it be before we are here again?

In the last 20 years the influence of private equity in the UK’s care home chains has grown. Southern Cross, once the UK’s largest provider, collapsed in 2011 when it could no longer service its debt. The demise came after its owners sold and leased back the care homes they ran and used the cash to finance overly aggressive expansion.

Think it though. Care homes are running. The last time a chain went bust not one single one closed. No one lost their care nor home - investors lost a packet. So, what are the investors actually doing as they lose money? Subsidising the care homes with their losses.

More money has been spent upon those care homes than the taxpayer has had to stump up for.

In what manner is this a bad deal for the taxpayer? 

No one wants literary fiction therefore everyone must pay more for literary fiction

It is not quite true that no one wants literary fiction any more. Rather, that fewer people seem to do so and are willing to pay less money for it as well. But the answer we're told we must implement is indeed as in that headline - therefore everyone must pay more for literary fiction. 

And they do mean everyone, the dustman must be taxed so that the creative studies graduate can write for the Duke to read. As regular readers know we do not believe that all should be taxed so that the well off gain their pleasures - let them pay for themselves.

The actual report itself from the Arts Council isn't that bad, it's a reasonable enough look at the changes in this marketplace (please do note that a number of us here have written books even if not of literary fiction. We sympathise with those writing but that still does not change our view of what should happen).

It's what people are then taking it to mean which is the problem:

So, assuming that we are not going to tell writers what to write, and that we do not want literature to become the exclusive preserve of those who don’t need to earn their living, we need to find ways of enabling other kinds of novelists to continue.

This can’t just mean cutting the existing share of the cake into smaller, or different, portions; it has to involve speaking up loudly and forcefully for the size of the share to be increased.

Not being able to make a living doing what you wish to be doing is the universe's manner of telling you to do something else for a living. Harsh, but true - as with certain writers that we know intimately the money in books is such that for near all writers they are a hobby, not a life.

Further, that people will not voluntarily fund your desired working life is not an argument that they should be forced to. So, no. If fewer people want literary fiction, and are prepared to pay less for what they do get, this is not an argument for us all to be taxed to keep the literati in lattes while they write what we don't seem to want.

There is a slightly more cheeky answer possible of course:

There will be those who argue that this just shows that literary fiction is a hangover from the past, and the poor dears should knuckle down and resign themselves to writing what people actually want to read. But few would dare to make the same argument about experimental theatre or dance. And it doesn’t allow for the fact that – like both Pullman and Mantel – it may take writers decades to hit the jackpot.

OK, super. So, let us regard this as investment then. Actual, real, proper, investment. Those who receive grants, taxpayer money, face a higher (much higher perhaps) tax rate if and when they do become successful. You know, we've all invested in them, they came good, we get a return on our investment. An 80% tax rate for Mantel and Pullman? Why not?

Or is it that we hoi polloi really must just cough up or the activities of our intellectual betters? 

The drivel of 33 Theses For An Economic Revolution

We have a lovely little list of things wrong with economics which should be corrected. 33 of them, issued on the anniversary of Luther's list about the Catholic Church and so on. There's a problem with this little list. 

It's drivel. Rather than go through each, piece by piece, something important to note about the series of complaints.

There are entire libraries discussing the pros and cons of each of their specific complaints. Their first, for example, is that society gets to decide what it wants. Sure, that's one of the first things you're taught in economics, it's a positive, not normative, subject. It doesn't say "should," rather, "if, then." 

Markets are shaped by custom, law and culture? Sure, what does anyone think Wealth of Nations is about? 

Institutions shape markets? Don't we have an entire subject, institutional economics? 

One can go on through the list in such a manner. But to move up a level of complaint:

First, within economics, an unhealthy intellectual monopoly has developed. The neoclassical perspective

What they are complaining about is something much closer to "neoliberal" economics here. Neoclassical just isn't the correct target at all. For those entire libraries discussing all of the things they claim are ignored have used the neoclassical toolkit to explore them. In fact, pretty much anyone studying the economy at the margin is using that neoclassical toolkit.

But then to move up one more level of complaint to something so ludicrous that it's amazing that actual adults will make this mistake:

Economics must recognise that the availability of non-renewable energy and resources is not infinite, and the use of these stocks to access the energy they contain alters the planet’s aggregate energy balances, creating consequences such as climatic upheaval.

Excellent, the Stern Review, the work of William Nordhaus, the economic models of the IPCC, Marty Weizman, Sir Partha Dasgupta,  the very work that shows we've a problem, should do something about it (a carbon tax!) and so on all used that standard neoclassical toolkit to get to that answer.

But now to the real biggie - what is the basic contention of economics? Resources are scarce therefore we need to study their allocation. What is their contention? That the very science of the allocation of scarce resources ignores the fact that resources are scarce.

This is drivel.

Anti-English comments by Football Association of Wales are just not cricket

Last week the Chief Executive of the Football Association of Wales, Johnathan Ford, went public with comments on who would not become the next Manager of the Welsh national football team. He didn’t rule out an individual though, instead he decided to rule out everyone from England. Not just anyone from outside of Wales, he only ruled out the English, saying the “next Wales manager could be "foreign", but "definitely not English".

The reason this smarts is not just the blatant anti-English bigotry but also because it flies in the face of their policy on players. The most recent squad of 25 for the friendlies last month had 12 players born in England (James Chester - Warrington, Andrew Crofts - Chatham, Ashley Williams - Wolverhampton, Ethan Ampadu - Exeter, Dave Edwards - Shrewsbury, Lloyd Isgrove - Yeovil, Andy King - Devon, Tom Bradshaw - Shrewsbury, David Brooks - Warrington, Sam Vokes - Lymington, Marley Watkins - London, Ben Woodburn - Chester), the Captain was English born and every single one of that squad currently plays in England & for clubs in English towns & cities.

With so many English born and English trained players, taking Wales up to the 10th best team in the world in 2015, and given they're currently sat at a not-too-shabby 19th, you might think that the FAW would understand and appreciate the benefits that immigrant talent from Wales’ nearest neighbour has brought to their sport (this is not a uniquely Welsh phenomenon either, as this exploration of how World Cup teams would look without immigrants shows).

The CEO of the Football Association Wales can’t possibly think that Wales’ performance is poor because of their use of migrant labour, nor can he really think it’s the location of the manager’s birth (after all, the last two managers were Welsh born). So this is a matter of pure taste-based discrimination in which he has come out and said that he won’t accept applications from a group of people because where they were born. That it is English managers he wanted to ban is no more acceptable than if it were anywhere else, but it grates even more with the 20% of Welsh people who were born in England and the even greater number with familial links with the country next door.

In England we’ve had this conversation before, in a whole host of industries immigrants are a scapegoat. This is as true in football as it is anywhere else, migrants are seen as a useful mechanism to blame the failures of investing in training at home. There is a reason why non-national teams, private companies in a competitive environment, go after and source talent from across the world – and pay large salaries in the process – rather than relying solely on the locales where they are based. National teams piggyback off of this, and benefit when they do. The world cup in 2014 saw English Premier League players score 20% of the goals, with 80% of goals scored by players that are based at clubs outside of their homeland.

This upsets economic nationalists but true fans of clubs realize it is the winning that counts, not the birthplace of the people who help them secure the silverware.

News hit yesterday that the FAW has whittled the candidates to the top job to three Welsh men. Good for them (I have no opinions on their qualification for the job), but can we honestly say this process has been good for the team, and good for the game?

Drugs are very expensive things to create

As we've pointed out more than once around here drugs are very expensive things to create. As we've also pointed out patents might not be the perfect solution to the public goods problem here but they're a useful one. Finally, we've also routinely pointed out that the cost of creation is largely based upon the regulations about gaining approval to sell something created:

The cost of developing a cutting-edge medicine has jumped 70pc in just seven years to £1.2bn, a Deloitte study has found.

Yet a survey of the world’s top 12 drug firms by R&D spend found that despite spending more on each treatment, the companies were struggling to increase profits.

Deloitte’s analysis – which included data from FTSE 100 giants GSK and AstraZeneca – found projected returns on R&D investment dropped to 3.2pc this year, down from 10.1pc in 2010.

Over the same period the average cost to bring a drug to market jumped to just under $2bn (£1.2bn), up from $1.2bn (£708m).

We would like to have more drugs available to us. For we'd like to be able to treat at least, if not sure, those things which we currently cannot. But if the cost of new drug creation continues to spiral upwards then we'll be getting fewer of those things which save our lives than we would like.

The answer, therefore, is to change that regulatory system. If we reduce the bureaucracy in between bright ideas in the lab and the sick rising from their beds then more of the latter will do so. As is so often true, the solution to our ailments is for government to be doing rather less than it currently does.