Public sector pain

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The government should lop 5% off every budget and every public salary for a year, no exceptions and no argument. It would be crude but fair, the price paid by a public sector that has done well over the past decade at the expense of the productive sector of the national economy. It is an expense that the nation cannot at present sustain.

– Simon Jenkins, 'Crude, but fair. The public sector must take the pain', The Guardian.

Archbishop of Canterbury’s views on the City capitalism veer close to populist sloganeering

Dr Madsen Pirie, in reply to the Archbishop of Canterbury, sets out that Capitalism has lifted more people from poverty and hunger than any other force in history, including religion.

I respectfully disagree with Dr Rowan Williams, the Archbishop of Canterbury, over his views on the City and its finance industry. He regrets there has been “no repentance for the excesses which led to the economic collapse,” and describes a feeling of “diffused resentment” that bankers have failed to accept their responsibility for the crisis.

While the archbishop is entitled to express his views, I am sure he will not mind me pointing out that these are somewhat uninformed views. He admits to not being an economist, saying the crisis has taught us that “economics is too important to be left to the economists.” I am sure he will not mind me pointing out, either, that financial services are not founded on greed. For the most part they represent honest trading by well-intentioned people whose skill lies in the efficient allocation of resources. This skill, internationally, has lifted more people from the blight of poverty and hunger than any other force in history, including religion.

Few economists think that the crisis was caused by greedy bankers. In increasing numbers they are coming to the view that recklessly loose credit created by politicians and central bankers sent false signals to the financial industry, causing them to act inappropriately and take on undue risks. Dr Williams describes a sense of “muted anger” at the bonus culture, pointing to a gap between what people are paid, and the worth of what they do. He might just as well criticise the huge rewards gained by footballers and pop stars, but the fact is that their pay reflects what people are prepared to pay for their services. The “bonus culture” is no different; it reflects the economic worth of people whose financial skills can add value to transactions.

Of course we can learn something from the crisis. Perhaps that banks should be encouraged to align bonuses with long-term returns rather than with short-term turnover. We can also learn that when governments try to “smooth” downturns for political advantage, it simply stokes up future calamity.

Everyone admits that there have been bad eggs in the City, as there have been in the Church, and perhaps in every walk of life. That is why we need institutions and practices to restrain them, and to improve these when they fall short. But to taint the financial industry with “idolatry” is to veer dangerously close to populist sloganeering.

Published on Telegraph.co.uk here.

Sound money

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Rather a shock admission from ex-Chancellor Lord (Nigel) Lawson at the Legatum Institute/AEI London Forum yesterday. I asked him to confess that his flooding the world markets with cheap money after the 1987 stockmarket crash got central banks hooked on the drug of cheap money – an addiction that grew and grew, until it inevitably ended in the cold-turkey episode we're just going through.

No, he said: China's hugely expanding population of savers meant that rates were naturally low. But, he said, he did think that mistakes were made during the 'Big Bang' deregulation of London's financial markets in the 1980s. Of course, the Big Bang had to happen. I remember the City of London still being in the quill-pen era, while technology and communications allowed its business to fly to other centres across the world. But when retail banks, stockbrokers, commercial banks and all the rest started to merge, the old relationships and restraints broke down. US banks came to London, relieved to be able to grow, free of Glass-Steagall and other onerous regulation. The Bank of England wanted the UK banks to be in the same league, and encouraged the mergers of retail and investment functions.

That active encouragement, Lawson suggested (if I understood him correctly), was a mistake. He would like to separate investment and 'utility' banking, so that customers know where they are. If we bail out anyone in a crisis, it should be the small retail customers of conservative banks who have come a cropper for some reason, with the Bank of England as lender of last resort (a role it seems to have messed up a year ago). But taxpayers shouldn't bail out the professionals in the world investment markets, who know the risks they are taking.

Amen to that: but I'd like to add the sine qua non of sound money into that particular policy mix.

Good-for-nothing government?

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altI was interested – but not at all surprised – to read in The Times last week that cycle lanes actually make cyclists less safe. According to a study by the universities of Leeds and Bolton, cars drive far closer to cyclists where there are cycle lanes, putting them at a much greater risk of being hit. It's a classic example of the law of unintended consequences at work: when motorists sense that cyclists have their own designated lane, they don't go to such trouble to give them space.

This is just the latest indication that government-inspired "road clutter" designed to make us safer on the roads often ends up having the opposite effect. The Dutch are probably the pioneers of this: the town of Drachten famously removed all traffic signals, and found that traffic flowed more smoothly and that accidents were reduced, not least at Laveiplein, a 22,000-vehicle-per-day junction next to a bus terminal.

But the technique has also been applied in London. As the Telegraph reported back in 2006: "Kensington High Street has been decluttered by removing barriers and simplifying road markings. Pedestrian accidents in the affected area have been reduced by more than 40 per cent." More recently, Ealing has followed suit, announcing that traffic lights would be removed from up to seven junctions leaving drivers to fend for themselves.

What this illustrates, ultimately, is the way in which spontaneous orders based on voluntary co-operation tend to be more efficient and effective than coercive ones based on government planning. Or to put it another way – letting people take responsibility for themselves usually works out better than having government take responsibility for them.

It also suggests that even in policy areas that seem so naturally the preserve of government planners, like traffic management, approaches based on individual freedom are well worth considering.

Nudge off

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"Persuading Us to be Good" is a new programme on BBC Radio 4 broadcast last night and previewed here. The question the article opens with is, "Are you a good citizen?" If you are bad, and you aren't recycling your grandmother in the name of Gaia, then how does the government get you to act? They may ultimately be investigating the use of advice from behavioural economists who have developed the idea of influencing human behaviour via gentle prodding and goading.

"Let us do your thinking for you. We know you are busy and don't have time to find out about the issues that matter to us. We know that you hold completely different, yet, irrelevant issues, dear to yourself which we will gloss over. We will provide you with all the government sourced information you require for us to make a decision for you. But just so that we can alleviate the guilt of telling you what we want you to do, we're going to let you do a little for us via us moralising at you." That's pretty much what paternalism is. How do you get large swathes of the informed populace to take up crass public policy initiatives that have little or no benefit to the broader scheme of things? Especially when there is zero incentive to the persons undertaking the sacrifice. (The warm fuzzy feeling that the bureaucrats feel inside does not count as an incentive).

The question should not be whether politicians can shape our behaviour but can information put forward by either side of an argument persuade us. Imagine if there was no imposed cost upon our liberty with regard to our paying of taxation. What would the outcome be if we were allowed to offer up our own sums of what we thought fair. It would not be what the government thought fair. It would not be what the moral minority thought it should be either. There is little difference between nudging someone or standing over them with a gun. Both impose upon liberty and both subjugate the individual to a will that is not their own.

One year after Lehman's collapse

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Is it true that in hindsight everything appears in 20/20 vision, or is the government so confident in its own conclusions that is refuses to take a better look? Marking now a year after the fall of Lehman Brothers, and the beginning of the current economic recession, it seems that all we hear from political leaders is that the entire economic recession was caused by too little oversight and regulation by government. But are governments trying so hard to be seen doing something about it that we are headed towards massive amounts of over-regulation, and perhaps planting the seeds for further economic crises?

Government intervention was in large scale the cause of the current economic crisis. In America, for example, the government organized programs aimed at what it called “fair housing" to give all Americans the chance to own a home regardless of past economic or credit status. Fannie Mae and Freddie Mac were essentially the long arm of the government to carry-out these programs and were given a direct line of credit into the US Treasury. The problem is that governments are not willing to leave anyone out, or have any losers, since their primary interest is in pleasing the masses and not turning a profit. The private sector may leave some people out, but it also doesn’t throw massive amounts of money to people that will never be able to repay either - that is unless the government throws equally large amounts of money at them first without expecting repayment. Governments simply do not internalize costs or risks, and government money carries those same tendencies with it. There was just too much of it floating around in investment firms pocketbooks.

Now governments all over the world are once again trying only to please the masses without internalizing any of the costs. They are cracking down on CEO pay and bonuses, limiting investments, and in some cases taking ownership stakes in high risk areas. The government just can’t keep its hand out of the market. The current conditions are due in large part to government covertly trying to buy the free market out, and now they are openly trying to suffocate the market which can only lead to similar or worse outcomes.

A creative department

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As an example of dodgy government statistics, the Taking Part Survey* by the Department for Culture, Media and Sport takes some beating. In an effort to prove their success at encouraging participation, they’ve come up with some gems of creative terminology:

  • ‘Attending an art event’ stretches to seeing “street arts (art in everyday surroundings like parks, streets or shopping centres)".
  •  'Visiting a historic site is as easy as going to “a city or town with historic character".
  •  It counts as using a public library if one “used a computer outside the library to view the website".
  • The most popular way for Britons to participate in an arts activity in 2007 was by “buying original/handmade crafts".
  • The list of “active sports" includes snooker.

Shameless.

*Technical Note PSA21: Indicator 6", “annual data 2006/07", “Final assessment of progress on PSA3: complete estimates from year three, 2007/08." All published since May 2008.

How to save £50bn

 

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Readers may already have noticed an excellent new report – How to Save £50bn – which was jointly published by the Institute of Directors and the Taxpayers' Alliance last week. The logic behind its call for spending cuts is impeccable and, I would have thought, difficult for anyone to disagree with:

  • The UK faces a massive fiscal crisis, with borrowing going through the roof.
  • If the economy does not recover as well as the government forecasts, the deficit will be even worse than anticipated.
  • Failure to bring borrowing under control could lead to the UK losing its AAA credit rating, which would have serious knock-on effects on Sterling and interest rates.
  • Higher taxes could smother economic recovery, which would make reducing the deficit even more difficult.
  • Public spending grew more quickly in the UK between 2000 and 2007 than in any other OECD country. That's why we have a structural deficit.
  • We need both long-term reforms and short-term spending cuts to tackle the deficit.
  • Governments can bring spending under control if they really commit to it: look at Canada in the 1990s.

The report then goes on to make 34 separate recommendations for reducing public spending, which would save just over £50bn in total. I've pasted a full summary of their proposals below (click here if you can't see it).

This IoD/TPA report is an important contribution to the debate on public spending, and one that I hope policymakers will take seriously. The ASI is working on a similar project at the moment, which focuses a bit more on capital expenditure. We are planning to publish it early next year.

ISOS - 15th October 2009

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On Thursday 15th October the ASI will be holding its next Independent Seminar for the Open Society; our one-day conference for sixth-form students with an interest in politics and economics. Named after Sir Karl Popper’s book The Open Society and Its Enemies, the conference is based upon the principles and consequences of an open and tolerant society.

ISOS always attracts prominent and distinguished names from all areas of politics, journalism and business; past speakers include the likes of Boris Johnson, Andrew Marr and Yasmin Alibhai-Brown. A key attraction of ISOS is the way in which students are able to get involved with the issues discussed. Following each 15-20 minute talk students are invited to question each speaker on their topic, and voice their own opinions and reactions. Talks promise to be on the cutting-edge politics and economics.

This October the speakers will be Brendan O’Neil, editor of Spiked Online and co-founder of the Manifesto Club, Conservative MP Sir Malcolm Rifkind, LibDem MP Lembit Opik and ASI President Dr Madsen Pirie. This October will also see the first ISOS debate (debators tba).

To apply for a place, please send an e-mail to isos@old.adamsmith.org. School group bookings are welcome. Places for students are limited to 200. A flyer for the event is available to download here.