Whitehall should manage the what, not the how

BIS may not have noticed the British steel industry going to the wall but they at least deserve sustained applause for getting something right. For twenty years and more they have been assessing their International Trade Advisers on how they spent their time, not what they have achieved.  Critics have been suggesting that, as ITAs were supposed to be turning SMEs into exporters, maybe they should be assessed by the number of new exporters, or the value of exports they produced.  Now, UK Trade and Industry, under the leadership of the excellent Dr Catherine Raines, has done exactly that.
We taxpayers give Whitehall our money for things we could not otherwise achieve for ourselves. Is it not blindingly obvious that value for money should be assessed by what that money achieves, not by some contrived analysis of  how public servants spend their time?
Yet department after department has not got the message.  The Department of Health thinks it knows how to be a doctor better than doctors do.  Education likewise thinks it knows how to run schools better than teachers do.  The most disgraceful, perhaps, example is safeguarding children, or perhaps failing to do so.  The Department’s response to each child abuse scandal is to commission another enquiry.  This then further complicates the way child workers are supposed to spend their time which in turn leads to more safeguarding failures and so it goes.  Rotherham at 1,400 abused children and counting may prove an all time high but child workers are so busy with redundant admin that you can bet the abuse continues willy nilly. 
One such enquiry was headed by Lord Laming who, in 2003, said:
 “17.65 There was no doubt that the work of each of the key agencies supporting children and families should be rigorously monitored. In the past, the tendency has been to concentrate on the measurement of inputs; for example, the size of the budget, the number of staff, or the range of equipment used. This approach is of limited value and does not address the more important question of what is actually being achieved, and whether the lives of children and families are being improved by the investment.”
13 years later that attitude has not changed. This summer we are expecting another “Single Inspection Framework” from Ofsted setting out how social services should spend their time to please Ofsted, not how outcomes should be measured, still less how they should be used to assess child workers’ achievements.
When the Minister’s attention was drawn, again, to the need to monitor outcomes, the response (19th April 2016) was, if the status quo was inadequate, to consider “alternative models of delivery”, i.e. having child workers spend their time differently and, no doubt, confusing them further thereby.  Please, Minister, just establish the required outcomes and let child workers get on with it.  

Can National Pay Bargaining in the NHS Kill?

Pay for NHS clinical staff (nurses and physicians) is set nationally, with very little variation to take into account local labour market conditions. This is a problem because in the UK regional pay differences are high, even when you control for things like education and skills. As a result, there are large differences in the UK between wages inside and outside sectors where pay is strictly regulated like the NHS. In some regions NHS clinical staff are overpaid relative to local labour market conditions, while in others (London and the South East) clinical staff are underpaid and would get higher pay if they left the NHS for the private sector.

This leads to worse outcomes for patients according to a 2010 paper from Propper and Van Reenen. Looking at the hospital death rate for heart attacks alone, they find that national pay setting for NHS clinical staff (nurses in particular) leads to 366 extra deaths every year.

In effect, national pay setting in the NHS for nurses acts as a price ceiling in high wage regions, which in the absence of other countervailing factors should generally lead to an undersupply.

There are two major predictable effects of this defacto price ceiling.  First, we should expect nurses to move from areas where their wages are relatively low (London and the South-East) to areas where their wages are relatively high (South-West and the North-East). Second, we should expect nurses in London and the South East to leave the regulated sector (NHS) for the unregulated sector (private nursing homes) where they can expect higher pay. Put simply, we should expect the NHS to get better in low wage regions, and get worse in high wage regions. 

Now this alone doesn’t really tell us much about the overall effect of setting pay nationally in the NHS. Perhaps the benefits of better service in the North-East outweigh the harm of worse service in London.

However, the data implies that regulating pay leads to worse outcome across the NHS on balance. Part of the problem is that people have strong area-based preferences: they aren’t willing to just up sticks and move across the country unless they’re getting a serious jump in wages. So instead they’ll be more likely to stay in the high wage region and just leave the NHS altogether to move into the nursing home sector where pay isn’t set nationally. 

On balance, this leads to 366 extra heart attack deaths each year across the NHS. But the authors suggest this figure might, if anything, be understating the harms of national pay setting:

If we were able to calculate the fall in quality across a much wider range of illnesses (deaths and more minor loss of quality of life), we would scale up the social loss by a very large amount.

If we devolved pay negotiation and hiring powers to trusts, we could raise standards across the NHS and most importantly, save lives!

New paper: Evolution not revolution

The ASI has a new paper out today from our Brexit unit, written by Brexit unit head Roland Smith, aka "White Wednesday". In this paper he makes a positive case for Brexit—based on Britain's liberal tradition and how it clashes with the EU—and explains why, if we leave, the EEA is the only attractive option. We should aim for 'evolution, not revolution'.

Read the paper online here.

Download the paper here.

The government is killing 80,000 people a year apparently

And it's all because of austerity, privatisation and the distressing lack of Environmental Health Officers. No, really, that is the claim:

Thousands of people are dying each year because of the government’s failure to tackle food poisoning, health and safety breaches and pollution, a thinktank is warning.

A new report from the Centre for Crime and Justice Studies (CCJS) claims that lax regulation and weak enforcement are failing to hold businesses in check and are tantamount to state-facilitated “social murder”.

The report, by Professor Steve Tombs, head of social policy and criminology at the Open University, claims that some 29,000 deaths in the UK are attributable toairborne pollution alone. A further 50,000 people die as a result of injuries or health problems originating in the workplace. Each year food poisoning results in 20,000 people being hospitalised and 500 deaths.

The report itself is here. There's ever so slightly a logical problem with the claim though. Let us assume that the evidence presented to us is correct. There are fewer inspections being carried out by those Local Authority employed EHOs. There is also that number of deaths from those causes. This is the result of Tory austerity and Yah! Boo! How Terrible!

However, the important thing we need to consider is whether this change in the regulatory regime is leading to more deaths from these causes or fewer. It is possible that having more private sector inspectors, more industry involvement and less LA, is improving the system, not making it worse. We don't say it is doing so you understand, only that it is at least potentially feasible. Just as the case being made, that less LA involvement is making the system worse is feasible. But that is the case that needs to be studied. Is the new system increasing or reducing the number of people dying from these causes? 

We don't know and on a Sunday morning we're not inclined to go look it all up. Which is why we would rather hope that a report trying to make the case one way or the other would provide some evidence. Which this report does not. It doesn't even begin to discuss the subject. It simply states that there's less LA and EHO involvement and also that this number of people are dying. There isn't even a start to an examination of whether those numbers of deaths are rising or falling.

The paper thus fails the most basic logical test of its own assertions. We're not very interested (not unless we're the union that EHOs belong to) in how many EHOs there are: we're interested in how good the regulatory regime is. Which is the one thing not considered in the slightest here.

Seriously, measuring the effectiveness of regulation by the number of bureaucrats employed to regulate isn't the way to do it. Must try harder, F - is your grade, see me after class.

People don't get it on CEO pay

Recently I debated executive pay on Twitter with the FT's Kadhim Shubber, The Times's Daniel Finkelstein and others. I had written a letter to The Times arguing that according to a preponderance of evidence, CEOs are actually worth their huge salaries. Indeed, they probably create, and sometimes destroy, firm value worth orders of magnitude more than they are paid.

I used the example of Thomas Cook boss Harriet Green, whose £3m salary was dwarfed by the £400m wiped off the market capitalisation of her firm when she left. Shubber argued she was a bad example, because her departure was accompanied by worse forecasts that also hurt the firm. This is probably fair—perhaps the portion of the loss down to Green herself was small enough that she really wasn't worth it, though I doubt it.

But Shubber went on to argue that it was bad in general to use share price movements as evidence of executive performance, because departures are associated with uncertainty. It is true that investors are likely to value firms lower if the variance of their expected returns—the spread of possible profits and losses—is higher, even if the average returns expected are the same. This is rational given risk averse preferences. But there are a few reasons why this probably isn't the only, or even the main, factor driving the equity movements we see when bosses move.

Firstly, it has a hard time accounting for cases when shock CEO deaths or departures raise the stock price. When poor Steve Ballmer announced his resignation as Microsoft chief the company instantly got around 7.5%—or billions of dollars—more valuable. The stock price rose 39% in the year following. Sometimes executives are having a huge impact, but a negative one. Despite the uncertainty, markets rise.

Secondly, it's not just the stock price that reacts. When there is a shock death of a CEO, or even of a member of a CEO's family, this hurts profitability, investment and sales growth, particularly if the boss is relatively long-tenured, or if the family death is their spouse or child (not so much if it's their mother-in-law).

Thirdly, it's not just death or departure that hurts or improves prices. CEO hospitalisation dramatically hurts firm outcomes, particularly if the executive is young, highly educated, and if the firm is in a rapidly growing business environment—exactly when CEO influence would be expected to matter the most. Similarly, when the boss has more invested in the firm, or when they are measured as putting in more effort, the firm does much, much better. And when firm control is "inherited"—when CEOs dictate the choice of successor to a relative or friend, firms do substantially worse. All of this points to CEOs mattering a lot.

If this is all true, Shubber asks, then why has CEO pay risen so much over past decades. For a while, we only had hypotheses, suggesting that firms were growing ever larger in size, wider in scope, and more complex and globalised in organisation, making the decisions at the top ever more important. But a recent swathe of papers seem to confirm our intuitions and guesses: 1. CEO deaths, always a cost to firms, have become ever more costly recently; 2. bigger firms have always had more expensive CEOs; merely applying this relationship to the growth in firm size 1980-2003 is enough to explain the average pay rise for bosses.

Boards may use rules of thumb to decide on executive pay, but the reason these rules (and the firms using them) survive, is because they are adaptive for firms; they are good ways of setting pay. Small differences at the top end of talent make large differences for firm bottom lines, especially nowadays. Firms lose a lot when their star performers go, and when they don't bid for the best possible boss. People just don't get it: CEOs really matter!