Bonfire of the quangos is mostly hot air

February 23, 2013

There are over 1,000 quangos in the UK. Today’s news that 192 of them are to be abolished appears to be concrete evidence that the coalition is taking radical action to reduce the role of government and cut the deficit. But then one reads the small print.

In reality most of these quangos will be abolished in name only. Their functions, and in all likelihood their staff, will simply be transferred to other government bureaucracies. The Regional Development Agencies, for example, will be transformed into Local Enterprise Partnerships with some of their responsibilities offloaded to BIS. Rather than abolishing a pointless layer of government, the coalition is rebranding it. With this process repeated across the quangocracy, it is far from clear that there will be big savings in expenditure.

The underlying problem is arguably the government’s attitude to regulation. Unless it takes serious steps to rescind the huge volume of legislation introduced in recent years, the coalition will find it difficult to scale back the associated bureaucracies. This relationship between regulation and quangos is clearly seen in the field of financial regulation where the government’s attempts to increase the volume of regulation will lead to one quango evolving into three or more. The important role of the European Union in the regulatory sphere is another obstacle to cutting many of these agencies.

The “fairness” agenda also appears to have hampered the process of scaling back the quangos. It is notable, for example, that the Low Pay Commission, which advises on the level of the minimum wage, has survived. A genuinely liberal government would of course abolish the minimum wage, together with the bureaucracy that goes with it – just as, in another Conservative age, the wages councils were abolished. Even a prudent socialist administration could save money by replacing this quango with a simple inflation-linked formula.

Cutting the quangocracy is in many ways an open goal. Many of the agencies have low profiles and are not highly valued by the public. The coalition’s failure to use this opportunity to achieve a significant reduction in the role of the state therefore augurs badly for next week’s Comprehensive Spending Review.

14 October 2010, IEA Blog

Filed under political economy Tagged with ,

David Cameron’s conference speech lacked intellectual coherence

February 23, 2013

David Cameron’s conference speech has arguably provided observers with important insights into the ideologies helping to drive coalition policy. Worryingly, there were strong elements of collectivism and egalitarianism in the Prime Minister’s address.

His discussion of “citizenship” was highly collectivist. He spoke of leading the change from “unchecked individualism to national unity and purpose”, a phrase which could easily have been uttered by a fascist despot, while the conference’s theme is “let’s work together in the national interest”.

Then there were the references to “fairness”, protecting the NHS, ensuring that those with “broader shoulders” bear the brunt of the deficit reduction programme (despite the fact that they have not been the main beneficiaries of the public spending splurge) and that children from the poorest backgrounds go the best schools. A whole host of interventions were lauded, on regional aid, high-speed rail, carbon capture and bank lending to small businesses. Yet there was also some anti-government content in his criticisms of New Labour’s record, as well as talk of decentralisation, free schools and transferring power from the state to society, leaving an overall message that lacked intellectual coherence.

Notwithstanding the rhetoric, there are several alternative interpretations of Cameron’s approach. One view is that he is genuine conservative who supports free markets but deploys the language of egalitarianism and collectivism in order to maintain the successful rebranding of the Party away from Thatcherism. A second hypothesis is that Cameron and his close confidantes are “progressives” who through an entryist strategy have successfully taken over the Party in order to move policy in a leftward direction. Another possibility is that neo-conservativism – an ideology which combines some facets of conservatism with a strong collectivist element – is influential in Cameron’s thinking. Finally one shouldn’t neglect the insights of public choice theory: there are strong incentives to satisfy interest groups as well as maintain voter support, while the need to satisfy Lib Dem coalition partners complicates matters. Ideology is often subsumed by political expediency.

However, recent policy decisions suggest that collectivist ideas are proving very influential within the Conservative-led coalition. There is a strong emphasis on redistribution, exemplified by the “fairness” agenda and by decisions to raise capital gains tax and to cut child benefit for higher-rate taxpayers, while raising child tax credit payments to workless households. Last week’s Equality Act imposed significant new costs on private businesses and was imbued with the kind of politically correct “cultural Marxism” that would have made it completely unacceptable to a genuinely conservative administration.

More generally, the first months of the coalition have been marked by huge tax rises and a raft of costly new regulations. The former might be justified by the politics of deficit reduction, but the latter signal that the new government’s economic philosophy is decidedly interventionist. If a free-market Cameron is failing to prevent new extensions of state power then this suggests weakness. If such policies have been directed from the top it suggests collectivism has poisoned the very heart of the Conservative Party.

6 October 2010, IEA blog

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Big government is here to stay

February 23, 2013

24 September 2010, Public Service

Public sector workers are understandably concerned about the outcome of the Comprehensive Spending Review (CSR). Trade union leaders have recently spoken of strikes and civil disobedience against planned cuts.

Yet such reactions are mostly based on rhetoric rather than reality. The fine print of George Osborne’s Emergency Budget reveals that government spending in real terms will remain more or less steady over the next five years. Indeed, when ministers speak of cuts, they often mean a reduction in previously planned increases in expenditure. The Treasury’s optimistic forecasts for economic growth are the key to the coalition’s deficit reduction programme rather than any dramatic scaling back of public services.

Nevertheless, since the budget for the NHS has been ringfenced, many of the mammoth welfare costs are politically untouchable, and because debt interest payments are likely to rise significantly, there will be immense pressure to make savings in some areas.

The history of previous “post-recession” periods suggests that capital expenditure will be a major target. We have already seen the cancellation of hundreds of school building projects and this will be just the start. Social housing grants to councils and housing associations will be pared back still further. And while expensive transport schemes such as Crossrail and High Speed 2 probably won’t be abandoned, their timelines may well be extended and their specifications reduced. A similar strategy is likely to be applied to major defence items such as Trident. The rate at which new hospitals are commissioned is likely to slow to a trickle as the NHS budget is diverted to “front-line” services to cope with the needs of ageing baby-boomers.

Another focus will be big IT projects, which in recent years have been plagued by delays, huge cost overruns and embarrassing failures in implementation. The Treasury has estimated total government IT spending at about £16 billion a year, and this clearly a relatively easy expenditure item to slash without significant political repercussions.

Such a policy will, however, mean ending the cosy relationship between departments and a small number of large IT companies. Similarly, the firms that rely on government contracts in defence, transport, education and so on, are likely to bear the brunt of economies in these areas rather than public sector workers.

The UK’s network of quangos will be another focus of the CSR. There are over one thousand of these agencies in the UK and a programme of rationalisation is certainly on the cards. Many quangos have a low profile and their roles are not well understood by the public. This makes them an easy target when political expediency rather than economic efficiency is the overriding determinant of where the axe falls.

Having said this, a significant proportion of quangos are very difficult to abolish. Some perform the basic functions of government, such as HM Revenue and Customs and HM Courts Service, while others are effectively required in order to implement European Union directives. It was instructive that the coalition was unable to remove an unnecessary tier of government by abolishing the Regional Development Agencies (RDAs). Instead, it is replacing them with Local Enterprise Partnerships and transferring some of the RDAs’ responsibilities to the Department of Business Innovation and Skills.

This pattern is likely to be repeated across government following the CSR. Quangos will certainly be abolished and ministers will speak of radical action being taken to tackle the deficit and reduce the role of the state. But in practice most of the staff and nearly all of the functions will be transferred to other agencies. There appears to be no genuine appetite within the coalition for the kind of attack on red tape necessary to slim down government bureaucracy significantly.

In conclusion, most public sector workers have little to fear from the findings of the CSR. There will be high-profile casualties, but the era of big government is definitely here to stay. Even if union predictions of 200,000 job losses in the near term come to fruition, this will represent well under 5 per cent of the total public sector workforce.

The coalition’s lack of radicalism may be reassuring to government workers, as well as the millions dependent on welfare benefits, but it also means that policymakers are doing little to create the kind of low-tax, low-regulation environment where entrepreneurship can flourish. The deeper issue of Britain’s rapid relative economic decline is not being addressed and as a consequence both public and private sector employees will be poorer in the long run.

Filed under political economy Tagged with ,

Lib-Dem socialism is poisoning the coalition’s agenda

February 23, 2013

Those of us who hope the Liberal Democrats will reject socialism and embrace true liberalism have many reasons to be disappointed by this year’s party conference. Nick Clegg, for example, returned to his soak-the-rich “fairness” agenda with an attack on “tax avoidance”. He claimed avoidance costs the economy £42 billion a year and is “ethically wrong”. Indeed, it was implied that it was morally equivalent to benefit fraud. In a similar vein, Danny Alexander, Chief Secretary to the Treasury, talked of giving HM Revenue and Customs even more draconian powers – hardly a liberal approach to taxation.

It would appear that the Lib Dems’ moral compass is skewed by strong egalitarian beliefs, which are incompatible with both traditional conservatism and free markets. This would explain the notion that trying to protect private property from appropriation by the government is equivalent to stealing from other people. It would also explain the Lib Dems’ strong advocacy of redistribution, environmentalism and supranationalism  – key tenets of modern socialism.  

The egalitarian element within the coalition (which includes some Conservatives) is likely to hamper attempts at radical economic reform. The big reductions in benefit rates necessary to tackle welfare dependency are likely to be off limits; wealth-generating tax cuts for high earners will be out of the question; and businesses will be severely damaged by yet more environmental taxes and controls.

At least the scale of the budget deficit effectively prevents the egalitarians from pursuing more activist policies in pursuit of “fairness”. Nevertheless, the Lib Dems and their ideological allies from the left of the Conservative Party are likely to ensure that the details of the deficit reduction programme are determined primarily by misguided notions of equality rather than long-term considerations of economic efficiency.

21 September 2010, IEA Blog

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Is it worth voting?

February 23, 2013

With the opinion polls pointing to a close result and the prospect of a hung parliament, turnout is expected to be relatively high in today’s election. Yet for economists this presents a bit of a puzzle.

Given that the chance of any single vote being decisive is so small, particularly outside a handful of highly marginal seats, the individual act of voting is arguably irrational – especially since costs are incurred, such as time and effort wasted on the trip to the polling station.

Moreover, one can only vote for a crude package of proposals, which in practice is likely to be changed significantly when it comes to implementation. The political process is extremely inefficient at responding to individual preferences compared with the fine differentiation of markets.

Worse still, various authors from the rational choice school (for example, Olson and Stigler) have shown that policy tends to be determined by special interests rather than the preferences of voters. The “logic of collective action” means that small concentrated groups have a far stronger incentive to commit resources to lobbying politicians and bureaucrats than large dispersed groups such as general taxpayers.

Special interests also engage in “agenda manipulation” to frame policy debates in particular ways and exclude perspectives that are detrimental to their cause. Indeed, Schumpeter went as far as to suggest that politicians and interest groups “are able to fashion and, within very wide limits, even to create the will of the people.” While this may be going too far, a strong case can certainly be made that such strategies further undermine the notion that voting “makes a difference.” (And in some cases, elite interests may simply ignore the wishes of voters, as with the ratification of the Lisbon Treaty).

So why do people continue to vote in large numbers? One hypothesis is that voters find it difficult to calculate probabilities and therefore don’t realise their individual vote is unlikely to make any difference. Another idea is that people vote because they value the preservation of the wider democratic process – they act out of duty and/or altruism. Neither explanation is very satisfactory from a rational choice perspective.

6 May 2010, IEA Blog

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US will pay a high price for Obama’s spending spree

February 17, 2013

There is talk of recovery, but little reason for optimism. Government action may have cushioned the initial impact of the recession, but the long-term economic consequences of borrow and spend policies have yet to be felt.

The problems are perhaps most severe in America. President Obama’s spending spree – in the name of economic recovery – means that this year about half the money the Federal Government spends will be borrowed.

Not satisfied with the worst debt levels since World War II, the President is embarking on a whole host of expensive programmes to subsidise healthcare, boost education and protect the environment. At a cost of $787bn, his Recovery and Reinvestment Act is the largest stimulus package in history. Much of this money will be used to fund social programmes and environmental schemes that will require further outlays to keep them going.

This follows eight years of Keynesianism under George W Bush, who increased public spending, strengthened the government’s role in the economy and allowed debt levels to spiral. He did little to tackle the growth of America’s welfare state. And as the baby-boom generation hits retirement age, there is now a big question mark over the future funding of existing healthcare and pension schemes.

As a result of Bush and Obama’s profligacy, the US budget deficit is likely to reach an unprecedented $1.6 trillion for 2009, and there appears to be no realistic strategy to bring it under control.

Such high levels of government borrowing will have a devastating effect on the prospects for sustainable recovery. They will damage the productive part of the US economy by crowding out investment in the private sector. And before long they will lead to higher taxes and interest rates, as the government is forced bring its debt levels under control. This prospect will inevitably undermine economic confidence and deter the business investment that drives growth.

A recent IEA study suggests that in this regard there are strong parallels with the policy mistakes made during the Great Depression. In the 1930s, another Democrat President, Franklin D Roosevelt, launched the “New Deal” in response to economic crisis. He increased government spending, ran huge deficits and launched an interventionist industrial policy which had eerie similarities to that of fascist Italy. Dramatic tax rises were also implemented, with the top rate of income tax eventually reaching 90 per cent.

Contrary to conventional wisdom, these measures delayed recovery by several years by deterring private-sector investment and stifling entrepreneurship. As a result, the US had probably the deepest and longest-lasting depression of all the major countries in the 1930s. Even as late as 1939, unemployment was close to 20 per cent and real incomes were little higher than they had been at the start of World War I.

Yet it would appear that today’s US policymakers have failed to draw the correct lessons from the failure of Roosevelt’s New Deal. Instead of moderating the burden of government on businesses by deregulating and keeping taxes low, they have focused on increased spending and state intervention as the solution to a faltering economy.

As a consequence, America is likely to lose its economic dynamism and will become more like the anaemic, state-dominated countries of continental Europe that have barely grown over the last 20 years.

In the worst-case scenario, the US could follow a similar path to Argentina, which less than a century ago was one of the richest countries in the world. Like Obama, when faced with economic crisis, its politicians turned to socialism, protecting and subsidising favoured industries.

The President’s policies will certainly increase the share of the US population that is directly dependent on government largesse. This risks nurturing the kind of destructive special interest politics that brought misery to Britain during the 1970s and helped to consign South America to decades of relative economic decline.

It also increases the chance of monetary instability. Historically, large budget deficits have often preceded periods of high inflation. When powerful groups depend on public spending, politicians typically find it easier to print money to pay off debts, rather than implementing deeply unpopular cuts.

Such a scenario would not just be a nightmare for the US. The UK, as a major trading partner, would also suffer badly.
Many hope that next year’s elections will bring some much needed restraint to US economic policy by reducing the Democrats’ majority. Recent history suggests, however, that, as in the UK, there is little difference between the major parties – Republicans have been similarly devoted to borrow and spend. If this proves to be the case and the US fails to change course, recovery is likely to be slow and America may lose its position as the world’s economic superpower.

21 October 2009, Yorkshire Post

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Time preference, economic crisis and social decline

February 17, 2013

The last decade has been marked by a combination of low savings rates and high debt levels in both the USA and Britain. Indeed in 2005, the savings rate in the US reached zero, while 13 million adults in the UK – more than 1 in 4 – have no savings or investments.

The lack of savings, together with the readiness to take on debt, suggests that a high proportion of the population has a high time preference. In other words, the present is valued far more highly than the future.

Arguably the current financial crisis cannot be divorced from the short-term, “hand to mouth” culture that has come to dominate the USA and the UK. The widespread unwillingness to defer material gratification contributed to the debt bubble that precipitated the crash.

But the negative consequences do not end there. People with no savings are also more likely to have to rely on welfare-state safety nets when they lose their job or develop a health problem. They will also tend to be more reliant on state handouts in old age and may therefore vote for socialist political parties that promise to increase such benefits. There is also a strong association between high time preferences and criminality.

While it may be tempting to blame “cultural decline” for the phenomenon, the absence of saving in countries such as the UK may in reality be a rational response to artificial incentives created by government policy.

It is perhaps not that low saving causes welfare dependence but the prospect of welfare that causes low saving. Benefit claimants with more than £6,000 may face steep deductions in means-tested payments. If they have over £16,000 they may receive nothing. And when they reach old age, the availability of means-tested pension credits means low to middle income savers will be barely better off than their spendthrift contemporaries.

Another issue is long-term residential care for elderly. While savers will lose their assets, including their home, non-savers on state benefits will generally receive care free of charge – this is a tricky issue but, at the very least, those who do not save should not be able to expect a guarantee of the same standard of provision as those who pay for themselves.

All in all, the incentives for deferring gratification and saving are very weak. This problem should be addressed urgently through the reform of pensions and benefit systems in order to restore the social and economic benefits of a low time preference culture.

24 June 2009, IEA Blog

Filed under political economy, welfare Tagged with , ,

UK debt crisis: politicians must wake up and smell the coffee

February 17, 2013

Britain now faces its worst ever peacetime fiscal crisis, yet our politicians seem incapable of grasping the seriousness of the situation.

Indeed, when Andrew Lansley suggested recently that a 10% cut in public spending would be required under a Conservative government, he was widely lambasted.

In reality a 10% reduction is unlikely to be enough, while Lansley’s proposal to ring-fence expenditure on health, schools and overseas aid will almost certainly be unaffordable. Indeed, this proposal to ring-fence such expenditure means that a 10% cut in other expenditure will not cut borrowing below the current projections at all!

Next year around one in every four pounds spent by the government will have to be borrowed. This is clearly unsustainable and needs to be addressed urgently to avoid jeopardising economic recovery.

All government borrowing crowds out private sector investment and thus government borrowing stunts the much-needed growth of the productive sector. There is also a real danger that debt will have to be issued at much higher interest rates, thus raising the cost of funding and increasing government spending further.

Increasing taxes to address the crisis would not be a wise decision. The tax burden is already at historically high levels and raising it further would discourage economic activity and would be unlikely to raise much extra revenue.
 
A substantial cut in public spending is therefore the only practical option, going far beyond what has been mentioned so far by Conservative Party spokesmen. And to achieve savings of sufficient magnitude it will be necessary to address the major areas of government expenditure: welfare benefits, pensions, health and education. It is difficult to understand why areas such as foreign aid are sacrosanct, given the well-known damage to the development of the poorest countries that arises from the over-provision of aid.

Unfortunately, the “vote motive” means that politicians are reluctant to be honest about the scale of the debt crisis facing the UK. Future generations do not vote and many of those who will bear the burden have not yet been born. The short-term outlook and self-interested behaviour of politicians, combined with an unwillingness to take the necessary action, are likely to have severe long-term economic consequences.

22 June 2009, IEA Blog

Filed under political economy Tagged with ,

What should Cameron cut?

February 17, 2013

The projections in last month’s Budget were terrifying. They suggest that net government borrowing is likely to reach unprecedented levels over the next three years: 

2009-10: £168 bn = 12.4% GDP
2010-11: £173 bn = 11.9% GDP
2011-12: £149 bn = 9.1% GDP

But even these forecasts may be too optimistic. They are based on GDP growth of -3.75% in 2009, +1% in 2010, and +3.25% in 2011.

But if the recession is deeper and longer than expected – say growth of -4.5% in 2009, -1% in 2010 and zero in 2011 – the deficit is likely to be closer to £200 billion for each of the next three years, equivalent to about 15% of GDP. Even when the recession ends, though, the structural budget deficit is still at alarming levels. This would mean almost one in three pounds spent by the government would be borrowed.

Clearly such high deficits are unsustainable and need to be addressed urgently if a funding crisis is to be avoided. Yet raising taxes above already historically high levels is likely to be counterproductive. It will yield little extra revenue in the medium term. A substantial cut in public spending will therefore be the only serious option available to the next government.

If the Conservatives win the next election, David Cameron will be forced to deal with this problem. And tackling the low-hanging fruit – cancelling ID cards, NHS computer schemes and Crossrail, for example – while worthwhile, will not be adequate when around £150 billion of annual spending reductions may be required.

It will be necessary to curtail the major areas of government spending: welfare, health and education. Indeed, emergency cuts, or at least freezes, in welfare benefits and public sector pay may be in order – the kind of measures seen recently in struggling central European countries. Indeed, we should start this year – welfare benefits, pensions and public sector pay should not rise by more than private sector pay rises. If public sector pay cannot be reined in this year it will never be reined in. If welfare benefits are not pegged to wage increases then employment incentives will be diminished.  

However, the crisis also presents opportunities for Cameron to launch positive longer-term reforms that reduce the scope of government. He could start by tackling public sector pensions (a liability of  over £1 trillion), move on to welfare reform and then health and education, promoting competition and efficiency through individual savings accounts and voucher-type schemes while getting rid of the costly bureaucrats.

How could this be done in practice? A voucher scheme could involve a voucher of a fixed money value being given for the first five years of the scheme. Its value in real terms – and certainly relative to national income – would then fall. This could be politically acceptable as it would happen at the same time as huge efficiency savings were achieved.

And let’s not forget regulation. Removing red tape – for example, the new gender pay audits  – would reduce the government payroll while lowering costs for businesses.

8 May 2009, IEA Blog

Filed under political economy

The slow death of private property

February 17, 2013

The part-nationalisation of Britain’s banks represents a further extension of state power and the erosion of private property rights. There is a huge danger that under political influence the banking sector will be compelled to pursue socialist objectives rather than maximise returns for shareholders. 

This development would be less worrying had it been an isolated example. However, the erosion of private property rights has been a long, gradual process. World War I played a key role, leading to a step-change in the role of the state and a huge expansion of its powers.

Taxation has been gradually extended ever since, particularly through the expansion of the welfare state, and now takes about 45p of every £1 earned (including indirect taxes). This in itself undermines private property, since the state takes a large share of any income earned from it and will confiscate property if tax is not paid.
 
The de-facto nationalisation of land, or at least development rights, with the 1947 Town and Country Planning Act was another important step. Owners were no longer permitted to use their land as they wished (subject to common law restraints on nuisance and voluntary restrictive covenants etc.). Instead government technocrats would direct land use centrally in a communist-style system.
 
Equality laws, whether based on gender, race or disability, have also undermined private property or, at the very least, freedom of contract. They have given government the power to enforce access by various groups. Yet it is impossible to impose equality laws without engaging in unfair discrimination. For example, disability rules have discriminated against certain businesses, forcing them to pay out for wider doorways, lifts and ramps. For the first time, the Disability Discrimination Act had retrospective effect in this respect.
 
However, there has been something more pernicious about recent acts by this government to undermine private property. The nationalisation of both Railtrack and the banks seemed to come about after government incompetence (or deliberate policy) undermined their values so that they could be bought on the cheap. And regulation has increasingly been used to move control of private property from the private sector to the government without any compensation. One of many examples is the ban on smoking in private pubs and clubs – a policy which has already led to the closure of many businesses.

23 February 2009, IEA Blog

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