Tag Archives: simon jenkins

The ‘sky cannot fall in’ school of economics.

There is an economic school of thought commonly held by politicians and journalists, which can be best described ‘as the sky won’t fall in’ economics’. What the practitioners of this economics believe is that the economy is a thing that just goes on delivering whatever politicians might do. There foolish decisions have some negative impact on the margins, but come what may the economy will still working as well as ever tomorrow. Such people described the financial crisis of 2008/9 as a ‘once in a lifetime affair’, it was what insurers call the unexpected, an ‘act of God’. What it was not was a crisis brought about by the foolish behaviour of bankers and politicians. The cause of the crisis was not the foolish speculative behaviours of the banking community or in the naivety of politicians in believing that the financial market could regulate itself, no the causes lay elsewhere.

Similarly in the U.K. we are suffering from a surfeit of ‘the sky won’t fall in’ economics from the Brexiteers in the politics and the media. Warnings of the dire impact that a hard Brexit will have on the economy are dismissed as ‘Project Fear’. One leading politician when warned of the damaging impact of a premature exit from the European Union (EU) on manufacturing industry, said that it won’t matter, as manufacturing only accounts for 10% of U.K. output. Only a person completely ignorant of economics could make such a foolish statement.

Yesterday a journalist who normally displays the utmost scepticism about politicians and politics revealed themselves as a member of this school of thought. He in his articles has on numerous occasions exposed the follies of politicians; yet he takes the word of these self same politicians that a premature rupture in trading relations with our biggest trading partner will have minimal impact on the economy. He writes that the day after Brexit the economy will be functioning as normal, planes will still be flying and there will be food in the supermarkets.

Yes the economy will still be there and it will be functioning, but the question he fails to ask is how well will it be functioning. To take his first example, yes the planes are likely to be flying, as it’s inconceivable that the British and European politicians can’t come to some agreement on airlines flying rights. (One must mention a proviso, politicians are just as likely to come to an agreement which is detrimental to the interests of our airlines, as beneficial. He assumes a competence which our politicians in the Brexit negotiations, have been singularly lacking.) What he fails to understand is that whatever results, the British government is exchanging an agreement about rights to fly over Europe that is highly beneficial for our airlines for one that is much less beneficial. What we do not as yet know is how much more difficult will it be for Britons to fly in and out of Europe. Obviously the uncertainty generated by Brexit will the day after Brexit lead to some cancelled or delayed flights. All that can be said is that British airlines won’t enjoy the same access to flight space over Europe than they had before. However what will obvious is that flying from Britain to Europe will become more difficult.

Journalists and politicians of the Brexit persuasion hide behind this uncertainty. I as an economist know that Brexit will be damaging to the British economy and society. Just because people such as myself cannot spell out in accurate statistical format the exact damage that Brexit will inflict on the economy, Brexiteers claim that we should not be believed as we really just don’t know. However to put it in its simplest terms believing the Brexiteers is asking the people to accept that there uninformed guesses are as good as my informed guess of myself and other economists.

John Maynard Keynes was once the doyen of British economists, but he is now so out of favour that his economics has been banished from the Treasury and political circles. As a consequence politicians lack an understanding and knowledge of his great insights to the workings of the economy. What all in politics and most in journalism have forgotten is his insight that the capitalist economy is inherently unstable. In his books such as ‘What is to be Done’ he demonstrated how the misguided decision making of the politicians had brought about the worst of all possible economic circumstances. The Peace Treaty of Versailles might have delivered peace but it also delivered a Europe wide economic recession. Imposing punitive sanctions on Germany wrecked the economy of what before 1914 had been Europe’s largest and most prosperous economy. The knock on effect was Germany no longer bought the goods it had previously, so spreading the misery of slow growth and high unemployment throughout Europe. Added to this British politicians made a series of decisions which worsened the impact of this depression on the U.K. The 1920s in terms of economic growth was a lost decade.

What cannot be stated often enough is that the economy is not a thing that will constantly deliver, regardless of the poor decision making of our political and business leaders. Just as with any human construct it has flaws and one flaw is its propensity towards instability. This unstable economy can be as easily pushed into recession, through the follies of our leaders as it can be thrust into exuberant growth through the ingenuity and good decision taking of the same people.

Bill Gates, Steve Jobs and all the other entrepreneurs of Silicon Valley kickstarted the information technology revolution, which led to a sustained period of economic growth. One only temporarily halted by the bursting of the dot.com bubble. A bubble caused by foolish speculators bidding to much for dot.com businesses. When it became obvious that these companies would never earn the expected profits, it became obvious that these companies had been overvalued, so there share prices collapsed, causing a loss of business confidence and a recession.

To this economist one the main causes of sudden changes in the business cycle are human folly and ingenuity. The economy is not a perfect construct it has weaknesses and foolish decisions made by politicians and businessmen can expose those flaws which leads to economic collapse. Similarly it has strengths which men and women of ingenuity can exploit to create immense wealth, which benefits all.

In answer to Michael Gove and Simon Jenkins, despite what you think, the ‘economic sky can fall in’. It’s the actions of men such as you that make this more likely to happen than not. Unfortunately the leading politicians in Britain at present seem to lack amongst them, people of realism and ingenuity that could prevent ‘the sky from falling in’.

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Public servants and their inefficient ways

Society has always needed scape goats for its many failures, it makes it easier if one can identify a person or group responsible for these failures, it avoids any difficult soul searching into the real cause of the problem. Usually these scapegoats are from an ethnic minority, it was only 50 years ago that boarding houses would have notices stating that the Irish were not welcome. Since that time new scapegoats have appeared usually from the new immigrants at one time is was Afro Caribbean’s who were blamed for the increase in crime in the 1980s, a role they have now vacated, which is filled by Eastern Europeans. However what is unusual is the addition of an occupational group to this list of scapegoats, that is the public servant. We are blamed for the lack of dynamism in society or as it is more usually termed economic growth. Public servants either through their adherence to bureaucrat practices make change so or impossible or they just syphon off tax revenues to little productive purpose.  
The outing of this parasitic group that feeds off the life blood of the economy was the work of the American public choice theorists. They highlighted our bad work practices, in the words of Charles Murray the public servants solution to a problem was always the same, to ask for more money to create a new department to deal with the solution and promote themselves to run this department. All that motivates us is the opportunity to increase our own status and incomes. Job security means that we don’t have to respond to public demand. Our customers the public lack any sanction to compel us to perform better. The solution is to break up these public sector monopolies into competing businesses that are forced to compete for the public’s custom if they are to survive. 
These theorists confirmed what society had always thought that we were a group of jobsworths who were only interested in feathering our own nests who provided the public with an abysmal service in return for our inflated incomes and job security. This is such an obvious truth that journalists such as Simon Jenkins can state with certainty that the education, health, legal and defence systems waste public money on a vast scale and that profligacy with public money produces little of value. It is such an obvious truth that he does not have to produce any facts or figures to prove his assertion, everybody knows that he is right.
Governments have long been persuaded of the truths of public choice theory, so much so that they have contracted out, wherever possible services to the private sector. Where services have remained in the public sector, they have created large external costly bureaucracies, whose only task is to ensure that public sector workers do their job, according to the principles of the free market. These inspectorates have names such as, the Care Quality Commission and their sole role is to police public sector workers. Neither the government or the advocates of public choice theory see the irony of having to introduce a large and costly bureaucracy to ensure that the public sector now works according to the principles of the free market. Public servants instead of experiencing the freedoms of the so called free market are in fact part of a new ‘Big Brother’ society. Winston Smith’s world is that of the new public sector.
Given that public choice theory teaches that public servants are only self interested of individuals who have little interest in serving the people the new inspectorate and public sector managers have to be vigilant to root out any of the bad practices and habits that are associated with bureaucracies. The only way they can achieve this is to monitor every minute of the public servants working day. However even the new bloated management teams and inspectorates cannot be physically present at every minute of the working day of each staff member. Consequently they have devised a system of targets which is constantly growing as inspectors are constantly thinking of new ones and workers are expected to provide evidence that they have been working to achieve these targets. This involves members of the staff team completing paperwork to demonstrate how they have achieved these targets.The demands on staff time for record keeping have reached such level that in teaching for instance the time spend on record keeping is creeping up towards 50% of time spent in work. The priority in the public sector has become not service delivery but record keeping which enables the manager to demonstrate the ‘appearance’ of staff adopting good working practices which is thought to be indicative of the quality of service provided. 
These new managers and inspectors have a fear of staff having free time on their hands, teachers provide perhaps the worst example in their minds. They have breaks when the children are going out to play or having lunch. Unfortunately for these new ‘public choice’ theorist children cannot be keep working without a break. This gives the teachers an opportunity to get together and talk, this give rise to the greatest fear of the public sector reformer, which is ‘canteen culture’. Given free time the teachers have the opportunity to discuss their teaching with their colleagues and what this enables is the dissemination of ‘worst practice’,the so called canteen culture or what others might call the ‘work ethic’. These reformers are terrified of the older staff passing on bad practice to new teachers. The only solution is to turn free or non teaching time into work time, this time can be used to complete some of the many records required of teachers to demonstrate good practice.
I can confirm the worst fears of the public choice theorists, we did not spend non teaching time discussing good teaching practice, but we gossiped about television programmes, who was having an affair with who, argued about politics. In other words we never used this precious time to discuss how to improve our teaching practice, we were of target or whatever the management speak is for wasting time. I can remember that is one school a group of staff had set up in one of the staff rooms the board game ‘Risk’ and spent all their lunch times playing this fiendish game. This surely demonstrates best the horrors of allowing staff to do what they wish with non teaching time.
Fortunately reformers were able to see the horrors of the old well established service practices and were able to sweep them away. Now in schools staff are constantly on target and the obstructive ‘canteen culture’ of the past is fast disappearing. As an example of the latter I can remember receiving a survey from the education ministry asking to complete and return so they could work on the results to improve teaching practice in all schools. I with all my senior male colleagues threw the survey in the bin. Today no teacher would contemplate treating with such contempt a directive from the education ministry.
What I going to suggest is that when we consider the fruits of these reforms the question to be asked is have the expensive reforms achieved what was intended or could improvements have been better managed at a much smaller cost. As a sceptical economist I tend to the latter view, perhaps an example from teaching will demonstrate my view better. The governments of today and the recent past keep trumpeting the success of their reforms as demonstrated by the improvement in school exam results. What these politicians fail to understand is that there is a different between coaching students to pass an exam and educating them. Educationalists will admit what makes a good education is open to debate, as is how students actually learn, yet our education ministers claim they know, in fact they have very little understanding of what makes a good education. It may be elitist to say so but throwing out a few spurious statistics will impress a gullible press and media but that all it is the appearance of an improvement in the education system.
Unlike most critics of the recent reforms I am not going to argue that the previous education system in which the public service ethos was seen as the main motivator was perfect but that the reforms introduced at great cost have failed to achieve their purpose. There were much better ways to improve a system that actually worked quite well, methods better than adopting a ground zero approach to reform. What reformers believe is only by destroying the old system and practices will they will be able to change the system. 
What Simon Jenkins the journalist and all the denizens of Fleet St., Westminster and Whitehall fail to understand is that public sector work is undertaken by people for other people, it’s a personal relationship. People are different and have different needs they cannot all be fitted into one schema developed some Whitehall bureaucrats under the direction of a politician. Policy is directed in way that will win favourable headlines. The teaching of reading demonstrates this, any educationalist or teacher will say that children learn to read in a variety of different ways.Yet the education ministry has declared in all ignorance that only one method is acceptable and that is phonics. Good practice or reality matters little to the Whitehall bureaucrat or politician, why matters is conformity to what is seen as good practice.
What politicians and the media are good at doing is seeing perceived failures or inefficiencies and acting in a way that is often counter productive to good practice. Certainly it is frustrating when you are queuing at the Post Office when the counter clerk takes what seems to be an inexplicable break, when there are huge queues in the office. Yet this may be the only way the stressed staff can cope with the myriad list of rules, understaffing and the sheer monotony of the work. However it is on this perception of the service that our political masters decide policy. When I was in the teachers staffroom myself and my colleagues would often express in disrespectful attitudes our attitude to our managers and the latest government initiative. Our disrespect was often a way of coping with the stress of the job, can I suggest it was no more than skin deep moaning. Today that would be considered as heresy and such negativity would be discouraged quite actively in the staff room, denying the staff the opportunity to let go, now everybody has to be on message. 
When prejudice becomes policy it makes for bad policy, the fact that every body knows that public sector works abuse the system to their own advantage, is the poorest basis on which to form a policy. The evidence for the poor performance of public service has never been more than anecdotal, yet it is on the basis of this anecdotal evidence that the reforms of the past twenty or so years have been based. While there may be some evidence for improvements in quality of service the evidence is not overwhelming. Policy based on an obsession with the minutiae of the workers daily routine it is obviously going to miss the ‘wood for the trees’. Success is now measured in small percentage increases in statistics, the sight of the bigger picture has been completely lost. The old British civil service had the skills and resources to focus the whole nation’s productive effort towards fighting the war, the new British civil service was unable to organise the competitive tendering by rail companies for right to operate the West Coast railway line. It was so poorly organised that the losing bidder Virgin Rail was easily able to get the decision reversed at a court hearing. If mistrust is the abiding characteristic of the relationship between ministers and civil servants the quality service provided is going to be poor.
To this sceptical economist it appears that the politicians having identified faults in the public sector have devised reforms that instead of improving the service have on the whole made it much worse public service.  

Alice in Wonderland Economics – understanding government debt

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When a politician asserts in a confident tone that he knows that public spending must be cut by £25 billion in the next Parliament you know he is wrong. There are no statements of economic truth that are as if they were sacred texts carved in stone. Economics is a subject of nuances, the likelihood of an event occurring are possible or probable, never so certain that they can be cast in stone. Even such a renowned sceptic as Simon Jenkins ( The Guardian, 8th January, 2014) states that everybody knows that public spending must be cut by £25 billion in the next Parliament. He falls into the trap of quoting economic think tanks such as the IFS that say it must be so, yet he has castigated such think tanks in the past for the fallibility of their predictions. If I can misquote Kierkegaard who said that public opinion is the dogs opinion, the same can be said of the consensus of economists. It’s invariably wrong, why were so many economists caught by surprise when the economy crashed in 2008/9. The few that got it right can be numbered on the fingers of one hand.

Two things can happen in the next Parliament, either the economy can grow faster than expected or slower than expected. Never as predicted by the economic forecasters, they don’t have the insight of Gods. If the economy grows faster tax revenues will grow faster than expected so public expenditure will need to be cut by less than £25 billion or if more slower by more than £25 billion. The IFS report will include these caveats in small print at the end. That is the part that politicians choose to skip, because they want to facts that will fit their purpose, not truths.

There is one thing that economists learn in their first year course which they then promptly forget. They learn that all economies are dynamic, that is they are constantly changing in what are often unpredictable ways. Acknowledging this makes the art of economic forecasting very difficult, only if economic forecasters ignore this insight can they make predictions about future trends.

II Real Wonderland Economics

Westminster in in a ferment of excitement about George Osborne’s proposal to put into law that there should be a limit on government expenditure. This is despite the failure of the EU to ensure that the countries that signed up to the Euro should limit their budget deficits to 3% of their GDP, which nearly all found impossible to achieve. Only a politician could believe that passing a law will make the impossible possible.

If George Osborne gets his wish there will be statutory limits to what the government can borrow. Yet nobody can know what a future borrowing requirements might be. Governments always need to borrow to cope with emergencies. There will be at some future time be a flu pandemic, which will require an immediate response. Does the government limit its response and let thousands die because the extra borrowing needed to fund a response would lead to a breach the agreed borrowing limits? Unfortunately we cannot say with any certainty that the government would prioritise saving lives over breaching the borrowing limits. Once such laws are passed they tend to become regarded as part of the hallowed texts of government and should be followed to the letter of the law. All that could be said with any certainty is that George Osborne’s proposed new law will hamper any future governments ability to deal with any future crisis.

There is something very strange about the public sector deficit. It involves a financial sleight of hand. To bail out the banks in 2008/9 the government had to borrow between £28 and £32 billion from the financial markets. Two of the big four banks were effectively bankrupt, but given the large sum to be borrowed all the banks would have contributed to the loan. Therefore there is the strange situation of the two of ‘bust’ banks lending money to the government to be given back to them as bail out money. This borrowed money was used to recapitalise the banks, through the purchase of shares in these banks. By some strange cleansing process bad money from Lloyd’s/HBOS and RBS became good money when passed through the cleansing hands of government. Too put it more simply the two bankrupt banks were lending money to themselves or financing their own bailout. When the financial community clamours for budget cuts to balance the books, it should be treated with scepticism given the chicanery it is prepared to countenance to maintain business as usual.

Even if the majority of the funding came from other banks, they were largely zombie banks kept afloat by state guarantee. In the year 2009 the British government stated its willingness to guarantee all the banks liabilities against default. This guarantee amounted to 86% of the UK’s GDP in 2009. A major run on the UK banks would have ruined UK Plc and its people. What do the people of the UK get from the financial community in return for this self sacrifice? Lectures about the spend thrift government and the need to mend its ways. Not a hint that the city has learnt anything from its foolish past prolificacy.

III A proposed solution to the budget deficit crisis

There has been something unmentioned in this debate about for the need for public spending cuts. The £25 billions of cuts is probably equivalent to about the total of the government money remaining invested in the banks. Why is there no suggestion that part of the cut in public expenditure could be financed in part by cuts in the funds lent to the banks? The reason given is that to sell the bank shares now would result in a loss, because their sale price is far below the purchase price paid by the government. To save the banks the government overpaid by billions for relatively worthless shares. If the government off loaded its current shareholding it would cause a catastrophic fall in the share price of both RBS and Lloyd’s/HBOS that would result in their bankruptcy. All that can be done is to sell those shares off gradually over a period of many years, as the price of those shares has rises.The financial community understands this all too well and in an incredible act of hypocrisy it insists that everybody other than them should pay for the misdemeanours of their community.

There an alternative solution that would cut public spending by a large sum and ensure that the city bears the cost of the bank bailout. Consols are a type of borrowing little used by governments today. They are government securities that do not have a date for redemption. I remember my economics teacher telling our class in 1965 that the country was still paying for the Crimean War in 1854, as the government still paying interest on consols issued at that time. The government should be prepared to force the city to accept the undated securities equal in total to the bank bail out fund. This could be done by exchanging securities with a fixed redemption date for these new consols. The bank bail out debt could then be parked in a special fund which could be run down if and when the government sold its shares in the bailed out banks.

The advantage of having the debt in the form of consols is that the government repays them at times at which it is convenient to them. There is also a penalty that bankers could face in any future speculative crisis. These undated securities are very price sensitive so in any future speculative frenzy they are likely to see their holdings of securities devalued so will they share in the losses experienced by the rest of the country. Unlike now when any speculative frenzy is always a ‘win win’ situation for the banks.

In the government accounts this bank debt should be shown separately and be excluded from the total of government borrowing, as is any money raised by PFI schemes. It would be one giant ‘suspense account’ whose debts were owed neither by the government or the city.