Wednesday, 31 March 2010

The cost of shedding public sector jobs

I can't now remember where I saw it but a couple of days ago a singularly absurd comment was left on a blog. It might have been one of the BBC blogs. The topic under discussion was a televised debate between the chief treasury spokesmen of the UK's two main political parties and a dancing gnome bearing a yellow rosette. One of the points made by the author of the blog was that none of the three debaters gave sufficient details of where and how they would reduce government spending so as to make either serious inroads into the annual budgetary deficit or into the cumulative debt resulting from year-after-year of annual deficits.

It is noticeable how politicians often fail to distinguish between annual deficits and government debt. The point is really very obvious. If you have £20,000 to spend this year but actually spend £25,000 you run a deficit of £5,000 and start next year with a debt of £5,000. That debt doesn't disappear at the end of the year, it stays with you until it is repaid. The next year you might still have £20,000 to spend but actually spend £22,500. Your annual deficit has fallen by half but it is still a deficit and at the end of the year you owe £7,500 (£5,000 from the first year's over-spend and £2,500 from the second's). Reducing the deficit does not reduce debt it merely increases it by less than during your previous period of profligacy. You can only reduce debt substantively by running a surplus rather than a deficit - for example by spending £19,000 out of your £20,000 so that you can repay £1,000 of debt.

In the comments to the piece a whole range of points were made, as one would expect. Among them was a full-frontal attack on the concept of running a deficit at all and a call for government to cut it's spending very substantially so as to run an annual surplus of income over expenditure so that the debt can start to be repaid. In answer to this obvious and sound approach was the comment that caught my eye. It's quite interesting how the mood of a writer can be clear from the way he or she expresses himself on the page. One or other of my regular readers can probably tell when I've had two bottles of wine before setting out my verbiage and when I am stone-cold sober, but it is also possible to tell whether something is written in a calm and reflective state of mind or as a result of furious exasperation. The mood appearing from the comment in question was undoubtedly one of "how can you be so stupid?" I could almost hear the deep sigh issued by the commenter before he put digit to keyboard. Perhaps you can will be able to tell how loudly I sighed on reading his comment from what I am about to write.

The comment can be summarised as follows: it is counter-productive to cut public sector jobs because it reduces income tax receipts and increases the welfare bill. I had read similar comments before and each time my lower jaw has been drawn downwards by something other than the weight of my chins. People actually believe that shedding someone from the public sector payroll costs the Treasury money. It's really quite staggering. Actually, it can happen, but only if the cost to the Treasury of him leaving his job exceeds the cost of employing him. Say his salary is £30,000 excluding employer's National Insurance Contributions. That means the Treasury's piggy-bank is reduced by £30,000 each year (employer's NICs are neutral because they are just one office of the Treasury paying money to another office of the Treasury). He pays, say, £6,000 in income tax and employee's NICs, so £6,000 that was taken from the piggy-bank is put back into the piggy-bank. More accurately, his income tax and employee's NICs are also just transfers from one desk at the Treasury to another desk and represent neither expenditure by nor income to the Treasury. The cost of employing him is his take-home pay, £24,000 on the figures I have given.

The mistake made by the commenter was to overlook that people paid out of taxes do not in reality pay income tax and NICs - income tax and NICs simply reduce the amount that is paid to the State employee but they are not receipts to the Treasury. The story does not stop there, however, become people do not live in a vacuum and their income does not exist in a vacuum. There are three respects in which dispensing with a State employee (let's call him Mr Paperclip) causes costs to the Treasury in addition to the cost of paying benefits.

First, let's assume Mr Paperclip had a net income of £24,000 and now receives £10,000 in benefits. The saving to the Treasury is £14,000 but Mr Paperclip also has £14,000 less to spend. The figures can be minced anyway you want, I will assume he would have saved £4,000 and spent £10,000 of which £8,000 would have been spent on things subject to VAT at 17.5%. The VAT on £8,000 of spending is roughly £1,200 (because the figure of £8,000 is the total of the cost of goods and services at about £6,800 plus VAT at 17.5%). That is a loss of tax revenue as a result of him no longer being employed so the saving to the Treasury is reduced from £14,000 to £12,800.

Secondly, because he spends £8,000 less at Mr Patel's Merrymart, so Mr Patel receives £6,800 less (not £8,000 because £1,200 of it goes in VAT rather than to Mr Patel). Had Mr Patel received that £6,800 he would have spent £4,000 at Mr Choudury's Cheerful Cash-n-Carry buying replacement stock and pocketed £2,800 himself on which he would have been liable to income tax and NICs of, say, £900. The Treasury loses £900. Mr Choudhury receives £4,000 less which represents £1,500 profit and the loss of a further £500 in tax and so it goes on through a whole chain of transactions. At each link there will be a loss of tax as business takings and profits are reduced but at each link the loss to the Treasury gets smaller and smaller as Mr Paperclip's initial withdrawal of custom is diluted. The financial benefit from dismissing Mr Paperclip is reduced by these knock-on effects.

Thirdly, Mr Paperclip himself is only one person, it will take a whole warehouse of office equipment to lose their jobs before any real effect is made on the government salaries bill. There will be chain-reactions of loss of turnover for many businesses and some of them will have to lay-off staff or even close completely. The loss of a private sector job is a real cost to the Treasury. Income tax and NICs are no longer received and benefits are paid, all of which affect the books directly; there is no element of the Treasury losing money which would have come out of its own coffers in the first place unlike the nominal "loss" of income tax when Mr Paperclip joins the dole queue.

For these reasons reducing the public sector payroll saves the Treasury the immediate net cost of employing people but not the whole of that cost is saved because there are knock-on effects on tax receipts and the cost of benefits. Nonetheless a net saving will undoubtedly arise because not every redundant public sector employee will remain unemployed for life, not all will draw benefits and the chain-reaction of tax losses involves ever-smaller sums.

Sunday, 28 March 2010

Why the NHS can never work

Whenever I hear debates about the NHS I am struck by something that is usually not said far more than by anything that is. The point rarely made is that you can fund health care through taxation without the delivery of the service being run by the State. In fact taxation funds all sorts of activities without having a direct hand in their provision, for example the payment of benefits allows people to buy food from supermarkets not from a State shop. The problem with the NHS, and the reason it is riddled with inefficiency and bureaucracy, is nothing to do with being funded out of taxation it is directly and necessarily a consequence of being under the political control of government.

One noticeable feature of the public sector is that dismissal for failing to do a job properly is reserved almost exclusively for the lowliest employees. There are notable exception such as the dreadful old bint who was squeezed out of her job at the head of a council's social services department as a result of the failings in the Baby P case, but her resignation/dismissal was more the consequence of public outcry than the imposition of a sanction by her employers. This, I am sure, is a consequence of the people at the top - the government ministers - being practically immune from sanction no matter what failings occur in their departments.

In the private sector there are consequences for not delivering a proper service and for wasting money on unnecessary fripperies. The directors of a company are accountable to the shareholders, the managers to the directors and the shop floor workers to the managers; the role of each is spelled out by their contracts of employment and failure to honour those terms can lead, ultimately, to dismissal. No NHS hospital manager seems to lose their job when wards are beset by MRSA and patients are left in their own soil. Were such things to occur in a private hospital heads would roll.

Tellingly, "superbug" infections are virtually unknown in private hospitals. In part this can be explained by the risk to managers' jobs were they to allow such conditions to prevail, but it is also the result of two other factors. First, the continued existence of the hospital depends on being able to attract customers. This means that hospital acquired infections not only put individual managers at risk they put the whole business at risk. Against that background it is no more surprising to find private hospitals to be clean than it is to find clean glasses being put in front of diners in a restaurant before their wine is served. Secondly, the business of a private hospital is built from the bottom up not the top down. Providing what the customer demands is a prerequisite not just to the business continuing but to it getting off the ground in the first place. This creates an ethos of offering a proper service first and restricting your administrative structure to the minimum necessary to run that service.

In all this, the till is the measure of whether an adequate service is being provided. Customers only pay if they get what they want at a price they can afford. If they do receive that, they pay and the bell on the till goes ding. Money is just the measurement used, however, it is not the judge of whether the hospital is doing things properly. The judge is the customer. What happens to his money is the evidence of his judgment. It might go into the till of hospital A or hospital B or hospital C, just as it might go into the till of Tesco or Sainsburys or Morrisons or some other supermarket. These supermarket giants succeed in business because they react to what the customers want and offer the best produce they can at the lowest price they can manage. The directors of these companies run their businesses by looking only at what is good for the businesses themselves and that is determined by what is best for the customers. There is no such thing as what is best for the directors there is only what is best for the customers, the directors might receive tasty bonuses when profits are made but that can happen only as a consequence of the customers' decision to shop at one rather than the other.

This fundamental difference between the public and private sector is only part of the reason why the provision of medical services cannot function efficiently as a top-down operation. The other important factor is that politicians will always see the NHS as something that can be used to their political advantage as well as being a means of providing medical services. The service can be brilliant but that will garner no extra votes unless the little people share the view that it is brilliant. More relevantly, the service can get worse or stay the same or improve only a tiny bit yet votes will flow from the little people believing it is better than it is.

There have been countless instances over the last thirteen years of the government launching expensive NHS initiatives and telling us they have been a massive success. It started with waiting times for treatment. Some treatments were provided instantly, others took time. Of course no one wants to wait if they need medical treatment but some waiting is inevitable because there are not endless resources. The result was diktats from above about waiting times with the continued funding of hospital departments being dependent on meeting the waiting time targets. The consequences were obvious. Waiting times in the problem fields fell by a combination of: (i) taking resources from a field in which people were not having to wait (so that they then did have to wait) and pumping them into the problem area and (ii) cheating by having doctors and nurses say hello to someone as they were approaching the maximum waiting time just so that it could be said they had been seen by a medical professional before the deadline.

There was another result, one just as obvious but much more expensive. In order to know whether the waiting time targets were met a whole new layer of bureaucracy had to be created and paid for. That layer exists purely for the benefit of the government. It exists so that statistics can be gathered, edited, massaged and falsified to provide the pre-determined result: "the government has improved health care". In fact it also creates a second unnecessary and expensive layer of bureaucracy at hospital level. Not only do they have to collect statistics for the government's number-crunchers to play with, they have to crunch their own numbers in order to preserve their funding for the following year. Bureaucracy costs money, money that could otherwise have been used to provide more hospital beds and more equipment. Remember, though, there are no votes in more beds and equipment, votes come only from the perceptions of potential voters. The process is an ever-more expensive spiral of unnecessary costs because you cannot stop after one initiative, the voter is a fickle being and requires constant persuasion.

Because politicians see the NHS as a way of gaining votes they cannot stop interfering, new initiatives are brought into effect before it has been possible to assess whether the previous initiative has been beneficial. The injection of additional funds is also accompanied by the need for additional statistics to show this new money has produced an improvement - not to measure whether there has been improvement but to show improvement. For the politicians it is utterly irrelevant whether an earlier change has improved the service provided to patients, what matters is whether it is beneficial to them, so they can abandon the last change at will or retain it and introduce another simply to get votes.

For so long as the NHS is under political control we will see the same thing happening. Every year it will become more expensive as more vote-seeking initiatives are added to the list and more pen-pushers are needed to keep track of what is happening. The provision of medical services will be guided to an ever greater extent by what the politicians think might be good for them with twisted statistics justifying their every move. And still superbugs will kill in NHS hospitals and be virtually unknown in the private sector.

Saturday, 27 March 2010

Beware the voluntary vegetarian

When people choose to adopt a cause they do so for reasons, it is not an accident it is the result of applying their mind to something and deciding to follow a particular course. Much of what we do is ingrained in us by the culture in which we grow up. Other cultures have different priorities and their people grow up following different practices. You can see this in all sorts of fields of life. In this context both national and local culture have a part to play, as does family culture.

Religion is an indication of this obvious truth. Why are most Pakistanis Muslim and most Italians Catholic? It's really very obvious and has nothing to do with people making an informed choice of religion after studying the core texts and the centuries of academic critiques of those texts. It is purely a matter of prevailing culture. One could say it is about default positions. If your parents are Muslim, Catholic, Hindu or whatever it is very likely you will be brought up to be a member of the same club, subtle pressures will be applied to you from the day you exit the vulva such that the default position is that you will align yourself to your parents' religion. It will take a deliberate decision on your part to follow a different path. And what made your parents Muslims or Catholics? Again the answer is usually that their parents were Muslims or Catholics. It is far more to do with culture than religious belief and the family religious culture can be reinforced by local or national usage.

The same applies to modes of behaviour. Those brought up to be polite and respectful tend to be polite and respectful, those brought up to bully others in order to get what they want tend to do exactly that. Of course there are exceptions, there always will be, but they are only exceptions they are not the bulk.

So it is again with food. In America very little lamb is eaten because it is not part of their culture. The country has no real tradition of farming sheep so the mothers, grandmothers and great grandmothers didn't cook much lamb, in turn the current generation doesn't cook much lamb. There is nothing dogmatic about it, it's just not something they do over there. Jews and Muslims are intoned not to eat Pinky and Perky and Hindus keep Ermintrude off the menu. America's shunning of the sheep is not doctrinal or dogmatic it is simply the result of generations of practice based on lack of availability. By contrast, the meaty practices of Jews, Muslims and Hindus are based on doctrine or, if you prefer, dogma.

One might think that rejection of a doctrinal/dogmatic cultural practice would result in a radical desire to persuade others of the folly of the doctrine/dogma, but that does not appear to be the case in relation to dietary "rules". The reason for this, I suspect, is that a Jew who likes a nice pork chop has no axe to grind with his cousin who prefers chicken soup. Man cannot live by pork chop alone, so the dietary heretic will probably also take chicken soup and gefilte fish. He might suggest to his cousin that a bit of crackling and apple sauce makes a tasty addition to the diet but knows he has no way of forcing a slice of ham down his cousin's throat. The same applies to Americans who like a crown roast of lamb. All they can do is invite their family and friends to try it but compulsion is not feasible.

And that is where we arrive at vegetarians. Some vegetarians are unfortunate enough to have been brainwashed by their gullible parents into believing that eating meat is not a beneficial lifestyle choice. Others have turned from a sensible balanced diet and chosen to adopt the freakish meat-free path. Not quite all of them are swivel-eyed fanatics and not quite all of them feel the need to impose their views on others, sadly more fall into both these unsavoury categories than is comfortable for civilised existence.

There is a fundamental difference between those who believe others would gain benefits from doing something they do not yet do and those who feel others would gain benefits from ceasing to do something they do currently. The former have no means of securing their desired result other than persuasion. You cannot legislate for people to eat a nice bacon roll but you can, in theory, legislate against the eating of the same product. That ultimate sanction, the criminal law, is the ultimate reward for persistence in arguing a prohibitory cause. Now, I doubt that we will see the consumption of meat outlawed for at least another year or two but the possibility is always there, particularly while the extant Secretary of State for Agriculture is a swivel-eyed vegetarian from a family of hugely wealthy Marxists. All the radical vegetarians feel they need to do is press their dangerous case further and further in the hope of one day reaching their goal.

In reality, their goal is not for the world to be vegetarian. I believe their goal is nothing more than to get their way. Their cause could be anything at all, it is not the particular change of behaviour that matters, it is that they will have forced others to succumb to their will. They are selfish bullies.

Just recently this was exemplified in my local curry house of choice. One evening a week a cleaner visits FatBigot Towers to scrape some filth off the walls; on that evening the property has to be abandoned by all other human life, which decamps to the curry house. One week a vegetarian came in to order a take-away, a single dish of spiced vegetables with plain rice costing a grand total of less than £4. The curry house provides complimentary popadoms and pickles for take-away customers to eat while they wait. The vegetarian consumed the free stuff, paid her tiny bill using a card (thereby costing the restaurant transaction charges), borrowed a stapler, begged a few sheets of A4 paper and left. On a subsequent cleaning evening the same vegetarian returned and placed the same order. Again free food was consumed and payment was made by card. Before leaving she said she used to order from a rival restaurant and was always provided with a selection of free pickles and chutneys along with her order, clearly threatening them with the loss of her valuable custom if they did not provide the same. I happen to know that the other place does not give waiting take-away customers free popadoms but she clearly didn't care to take that into her tiny lentil-addled mind. One might think the owner could hardly believe his ears, after all a take-away order with a minuscule profit margin would be rendered almost worthless to him, but he complied with her request and told me later that take-away customers ordering vegetarian meals almost always wanted additional freebies.

This didn't surprise me at all. Voluntary vegetarians have chosen their dietary path for reasons. Those reasons are almost always borne of selfishness and self-importance, even self-aggrandisement. Like those who sport red Mohican haircuts or rings through their noses they feel they are different from ordinary people. Silly hair and adornments previously reserved for cattle are there for all to see - "look at me, see how different I am, look at me, I wouldn't do anything this absurd unless I were a higher form of life than you, look at me, look at me, look at me". And so it is with those who have chosen to abandon proper food. Never mind the wisdom of countless generations, they know better and because they know better and are superior beings everyone must bow at their knee. And they all look so bloody ill.

Sunday, 21 March 2010

When in a cesspit, stop digging

The latest corruption scandal to hit the Labour government should come as no surprise to anyone. The rot set in at the first meeting of the new cabinet back in 1997 when the then Prime Minister said "call me Tony". This might just seem like a decision to avoid pomposity or unnecessary formality but it was actually much more. It marked a failure to distinguish between the man and the office he held.

Two consequences flow from that failure. The question every government minister should ask on every issue of policy is "what is in the national interest"? He will undoubtedly form a personal view when an issue arises but merely being a minister does not give you carte blanche to impose your personal opinions, you have to weigh your opinions against all relevant circumstances and reach a policy decision in what you consider to be the national interest. If you fail to acknowledge the difference between you and the office you hold, this exercise can easily go by the by. Secondly, and more damagingly in the long term, if you think the ministerial office is you rather than that you are temporary custodian of the office, it is easy to see the office as being for your benefit.

The corrupt offering by former ministers of insider links to government was exposed today in the Sunday Times and will be reported on further in a television programme tomorrow. Undercover reporters posed as having interests they wanted brought to the attention of government and given special preference. Part of what is reported is that the former ministers boasted of being able to by-pass what always used to be known as "the proper channels". The proper channels exist for good reason, just like the convention that ministers should address each other in cabinet by their ministerial office not their personal names. Going through the proper channels ensures that everyone is in the same position if they wish to make representations to government. Of course we shouldn't be naive about this, obviously the representations made by some people will be heard louder and faster because of who they are, but buying the ministerial ear is something the proper channels prevent because they require openness and full disclosure of any relevant financial dealing.

None of this is new, plenty have already made substantially the same points already while commenting on this story. There is, however, one aspect of it that has not gained the publicity it deserves. You see, once the former ministers were tipped-off and/or the influence they claimed to have exercised in the past was investigated and found to have been either wholly false or at least wildly exaggerated, they back-tracked and admitted to having overstated matters to the undercover reporters. One could hardly expect them to say anything else once they had been rumbled. But it doesn't stop there.

Whether or not they would be able to persuade current ministers and senior civil servants to look favourably on their clients' special interests cannot be determined by whether they had done so successfully before. Maybe they have never by-passed the proper channels on behalf of fee-paying clients but that does not mean they would not be able to do so in the future. They quoted fees of £3,000 to £5,000 a day for their services (I would guess VAT at 17.5% would be chargeable on those fees, taking them up to £3,250 and £5,875). It is hard to imagine that they would ask for such substantial sums in order not to achieve anything for the paying party. After all, if they never achieved a favourable outcome the gravy train would come to an abrupt halt. In order to earn their fees they would have to act corruptly, but that is not the point I am interested in. I want to go back one stage.

In order to earn fees at all the former ministers would have to satisfy potential clients that they should be engaged. At meetings held to discuss the prospect of their being engaged they made representations about having assisted others to achieve favourable results that could not have been achieved without their intervention. Now they accept that those representations were lies. In other words they were seeking to gain work by telling lies. That used to be "attempting to obtain a pecuniary advantage by deception" under the Theft Act 1968, it might now be worded differently and feature in a Fraud Act but the substance of the offence has not changed. They are in exactly the same position as Mr Hardup who tells lies about his circumstances in order to obtain a job or to obtain benefits he is not entitled to receive.

Perhaps I am missing something, but it seems to me that either they were telling the truth about their previous lobbying successes (in which case they were admitting to past corruption in order to gain fees for engaging in future corruption) or they were telling lies (in which case they were committing a criminal fraud in order to gain fees for engaging in future corruption). What is so peculiar about it is that their corrupt activities are not necessarily criminal offences, whereas telling lies to obtain money most certainly is a criminal offence. They just made their position worse.

"When in a hole, stop digging" is wise advice. In this instance the wording merits the change I have used as the title to this musing.

Saturday, 20 March 2010

Why do we seek economic growth?

The excellent Mr Stan left a comment last week questioning why so much store appears to be given to the state of the stock market. If you don't know Mr Stan you really should visit his place, he's on fine form.

He started his comment by expressing concern about the perpetual chase for growth, (be it in GDP, revenue or profits) and posited that it is done to try to improve standing in the stock market. He then questioned why the state of the stock market is treated as the most important indicator of economic importance. I don't often disagree with Mr Stan, but I do on this subject. Let me say why.

Seeking economic growth is not just about trying to get richer. Most of the time it is more concerned with trying not to get poorer. Inflation is always with us, so we have to improve our income just to be able to stand still. Some of us remember annual inflation running at between eight and fifteen percent for year after year and look on current levels as light relief from those times, but even at about five percent (my best estimate of the real cost of living increase suffered by real people today) someone with a disposable income of £10,000 must raise it by £500 next year just to maintain his current standard of living. The business he works for cannot just magic money out of thin air, it needs to receive more if it is to pay more, so it must achieve a growth of revenue just so that its employees can remain as they were.

More than that, people have ideas and want to profit from them if they can. Maybe they write a novel, maybe they invent something entirely new, maybe they see a way to improve an existing product or find a way to make an existing product more efficiently. They might be rich, poor or of average wealth but no one will stop them wanting to put their new idea into practice and to profit from it. That is human nature. Economic growth is an aspect of human nature.

That point is worth a few more words, not least because we are constantly beset by bleating greenies who tell us we should forgo material pleasures and commune with nature. How, I wonder, do they decide on the ideal state of affairs? Were they to be forced to live in an Ethiopian village with insufficient food and water for the population and hardly any access to medical facilities, would they jump with joy or would they say "um, actually we don't mean this sort of communing with nature". The answer is obvious. OK, how about sitting them in a bit of rural India where there is plenty to eat and ample fresh water but the homes are flimsy shacks and the food requires year-round hard labour in the fields? They don't mean that either. Do they mean somewhere like London in the sixteenth entry? An astonishing comfortable paradise compared to the Ethiopian village, but utter squalor compared to Victorian London. Do they mean Victorian London before fresh water and mains drainage were the norm? Perhaps that is approaching what they mean, but there is no sense in putting up with the avoidable problems of that existence when those problems are avoidable.

You can't have the benefits of economic growth without accepting that they are benefits of economic growth. You can't stop the clock and say "everything is tickety-boo" because everything is not tickety-boo. The concept is based on a false premise. The false premise is that we have reached a state of affairs that is good enough. There is a certain degree of logic to it because life for most of us now contains no real threat of starvation, malnutrition, death in winter from hypothermia or death at any time from cholera or dysentery. But that is to look on mere existence, mere subsistence, as a satisfactory state of affairs. Yet the definition of mere subsistence today is radically different from what it as a hundred years ago because economic growth has raised the bar.

The greenies who say we have a more than adequate existence today form that view by looking at things today and comparing them to times past. Why not roll the clock back a hundred years and apply the same argument? Life in the most developed countries was viewed as hugely comfortable because it could only be compared to what had gone before. No doubt there were arguments against seeking further comforts because the current state of affairs was viewed as quite good enough, thank you very much. We look at those times and see them as harsh and, in many ways, squalid. Has economic growth since 1910 been a good thing or a bad thing, has it improved the quality of life or merely added unnecessary luxuries? You can live as they did if you want to, but it's not for me. Even the nastiest sink estates contain homes of greater comfort than those inhabited by most British people a hundred years ago.

Economic growth provides real benefits on both an individual and a collective scale. Further benefits will accrue through future growth. They cannot be measured because we don't know what they are, they don't exist yet, but they will exist. Central heating, motor cars, fridges, washing machines and battery operated boyfriends for lonely ladies started as science fiction. Now they are everyday things that make life better. None of them would exist without a constant striving for economic growth spurred on by the profit motive. The same can, of course, be said of the personal computer, without which you would not be reading my meanderings. You see how important it is and how shallow life would be without it?

I doubt that companies seek growth in order to look good on the stock exchange. The stock exchange is just a measure of what other people see as the value of shares in the listed companies. Companies don't collapse because their share price falls through the floor, their share price falls through the floor because the company is collapsing.

Mr Stan is undoubtedly correct in bemoaning excessive reliance on stock exchange indices as indications of the state of national economies. Not only are too few businesses included for them to give more than a limited picture of the state of affairs but they also cover only large businesses and are skewed by fluctuations in the share price of the very largest companies. They are, however, some evidence of what is going on, particularly because the fate of shares in big companies affects such things as the value of pension funds and the premiums insurance companies have to charge. He described the stock exchange as "a glorified gambling cartel". There is a lot of truth in that but it doesn't stop it being a fair indication of the current state of big business.

Thursday, 18 March 2010

The inevitable dictatorship of causes

Perhaps the biggest difference between conservatives (with a small "c") and socialists is that conservatives do not pursue a cause. They do not seek to impose anything on anyone, preferring to just leave people alone and trust them to live as they see best with a fall-back of penalties for causing harm to others. In contrast, socialists must of necessity take a fight to the people. They do not trust us to live responsibly because they have a vision of the perfect world and are compelled to mould us, by force if necessary, to comply with their vision.

One problem with the socialist approach is that the vision can never be complete. There are always new situations for which no blueprint exists and new opportunities to extend the existing plan into areas previously immune from interference. Most tellingly, when the stubborn little people refuse to comply with the vision it is necessary for new ways to be found to enforce compliance. In the more brutal regimes that means physical assaults and even state murder, in a relatively civilised country like the UK it takes a different form.

What should not be presumed is that socialist politicians bully and coerce for the sake of being unpleasant. Of course there will always be some who do, but they do not reflect the real theme of their cause. The real theme is that life for everyone can be improved with careful guidance by the machinery of the State. Once you believe that, especially if you believe it passionately, no bullying or coercion are involved there is only the perceived need to take whatever steps are necessary to open the eyes of the little people to the benefits of the ideal society.

To a socialist there is only one acceptable way for people to live, which is according to his current view of the ideal State. When he changes his mind about something the new ideal becomes mandatory. Dissent, debate and variance are inconsistent with the attainment of the ideal State, so means must be found to ensure compliance. The single most important factor is the need for the little people to believe that the path set by the State machine is correct. If they are persuaded that this is so, they will follow that path without rebellion. But how do you persuade them? Conventionally three methods are used.

First comes genuine persuasion using words. That will attract a certain number to the cause.

Secondly come rewards for those who toe the line. No adverse consequences follow from not being on board, but those who have adopted the cause get benefits; these days that includes jobs sitting on Quangos and career advancement by showing dedication to the pet project of the day whether it be "climate change" or "diversity". Some will sign-up because they want to receive those benefits.

The third method is both inevitable and sinister. It is punishments for those who dissent. The punishments need not be particularly painful because they are more about setting the atmosphere than about causing people pain. After all, the first purpose of the exercise is to persuade people to board the train to utopia, only secondarily is the punishment intended to coerce. The atmosphere they need to set is one of agreement that the State knows best. Without the people agreeing that the State knows best, socialism can only be maintained by violent repression.

It is inevitable that the line between persuasion and coercion is easily blurred when your mind it fixed on the result rather than the method of achieving it. "We must persuade people that we are right" rests on the presumption that "we are right". When you hold that attitude no one can be surprised that you will use every avenue you can, including unlimited amounts of taxpayers' money and the criminal law, to assert your correctness and, necessarily, the incorrectness of those who do not agree with you.

And that is where "causes" become so useful for socialists. Causes are all about enforcing a particular pet interest by force of law. If you believe passionately that something, anything, must be done the most effective way to satisfy your urge is to get the law behind you. So socialist governments love to adopt causes because they add to the weight of the State. The longer the list of "thou shalt nots" the more power the State has over the little people. In order to make this a palatable approach it is important to concentrate on causes that already have a degree of assent so that the dissenters are maginalised not only by their chosen activity becoming illegal but also by being a numerical minority. The State strengthens the message that it has the best judgment by putting into law the suppression of activities that a majority either actively disapprove of or, at least, do not like to engage in.

What is more, the State benefits from a double-whammy. The majority, unaffected by the new prohibition, sees the law as reflecting their way of life and the minority turn from being a minority acting within the law to a minority acting against the law. If they do indeed act against the law they might face prosecution. If all they do is argue for the prohibition to be removed they are faced with a fight against the majority. And the authority of the State is strengthened by the knowledge that the majority accepts the position it has taken, even though the majority might have been wholly unaffected by the minority activity when it took place.

In a country of 60 million people there are countless causes to be added to the statute books. Every time one is added a new minority faces the choice of complying with the law or risking prosecution. "Live and let live" does nothing to aid the socialist cause whereas banning one previously lawful activity after another emphasises the authority of the State. It is a slow, creeping process and the nature of the British is to obey the law. But what about those whose previously lawful activity is now a crime?

Their dissent might fade away because they believe that complying with the law is more important than their personal interest. Not everyone will fade away even if they do comply with the new law, they might still argue for repeal. Not everyone will comply with the new law. Not everyone who disapproved of or was indifferent to the newly banned activity will believe it should be prohibited. Every ban breeds dissent, some passive and some active.

More importantly every new ban is, almost by definition, more petty than the last. Outlawing murder and theft is not difficult. You would be hard pressed to find anyone who would argue against those prohibitions. The more marginal the harm done by a newly-banned activity the more likely it is that people will respond by asking why it was necessary for the law to step in at all. Sadly for the socialist, the correctness of the State in all things never has been and never will be accepted by human beings. They can pander to any number of single issue fanatics by passing prohibitionist legislation but still there will be dissent.

The more petty the ban, the greater the risk of it being defied in deed as well as in word. The State machine has only one course open to it once it has imposed a prohibition, namely to enforce the prohibition. In principle it could undo the ban, but that would be to admit that the State was in error, something that is anathema to the socialist brain. The only course it can follow is to impose greater and greater force against those who continue to dissent. But there is a problem because the more petty the ban the less the majority is likely to look on it with favour. "It doesn't affect me or people I know so I don't care" is overtaken by "I don't do it but my uncle and brother do, and they are decent people". Then questions are asked about the justification for earlier prohibitions. The socialist State has only one answer "we are right, it is for your own good, you must comply". That position is unsustainable in the long term. Sometimes the very long term. Eventually Ceausescu's Christmas Day arrives.

The pain of not saving

I am pretty hopeless with money because organising money requires an ability to organise and I couldn't organise a fart in a curry house. In order to ensure I did not spend all my income on fripperies I used to open little savings policies by which I paid a certain amount in each month and could not withdraw anything for five years or more without suffering a substantial loss of interest. They are quite good for a chronically hopeless organiser because all you have to do is fill in a standing order form when you open the policy and the rest looks after itself. Even if the return is not very high, at least you have squirreled something away when you would otherwise have spent it on things you didn't need.

A curious fact about saving is that it can be utterly painless yet provide a tasty bonus when you finally get your hands on the money. Of course inflation is a factor and can mean that the lump sum you get at the end actually has less buying power than the small sums you paid in, nonetheless you still get a lump sum when otherwise you might just have bought another twenty exercise machines to add to the ten you did buy but never used.

Were you to save just £50 a month over five years and made no nominal profit at all you would receive a lump sum of £3,000. That's quite handy when you know you can't trust yourself to stick five £10 pound notes in a biscuit tin under the bed each month and leave them untouched for five years. Saving is not all about making a profit, it is also about preserving something which would otherwise be unavailable because of your disorganised character and spendthrift nature.

What applies to individuals also applies to businesses. If you own your own home you will have repair bills from time to time which could not always be met easily out of current income. Little things are not really a problem for most people, but a new roof or new windows can be, just as the need to buy a replacement washing machine or bed can put a strain on a tight budget. It's so much less painful to pay for replacements from a lump sum of savings, even if the real value of those savings has fallen 10%, than it is to stick the cost on a credit card and pay 20% or more. Businesses face the same problems. Things wear out and must be replaced, shops need to be refitted from time to time, new machinery is required to keep the business viable in a competitive world. These things all cost money and the sensible businessman makes provision for these future risks by maintaining a fund of reserves specifically to meet such costs.

It is rather different for government. There is no need for it to be different but it is because there seem to be votes in spending but not in saving. Of course government makes provision for replacing and repairing infrastructure such as roads and buildings but it does so mainly out of its annual income rather than by setting aside funds to form a pot that can be raided when the money needs to be spent. In one way this is both sensible and inevitable. Every year there are roads that require resurfacing and buildings that need replacement or refitting, so there is never a gap in which they can say "we don't need to spend it this year so we'll stick it in a biscuit tin under the bed". That is only part of the story, however, because this sort of expenditure is akin to you or me having to buy a replacement kettle or computer.

The other part of the story is that some aspects of government expenditure are, by their very nature, affordable only if funds are set aside for future use. Pensions are the most obvious example of this. It seems obvious to me that there is only one sustainable way to provide pensions for the retired. You build up a pot of money or assets during the person's working life and on retirement the pension payable must be limited to that which the pot can provide. Guaranteeing a certain level of pension payment without the pot being large enough to pay it means either taking additional money from those in work in order to subsidise those whose working life has ended or failing to honour the guarantee. That is a recipe for disaster.

There have been numerous examples of private pension funds not being big enough to pay the returns they had promised, with the result that either people who expected a certain income have received less or some have had their entitlement fixed and others have missed out entirely. The option of simply throwing more money into the pot does not exist for a private fund because it does not have the ability to force mugs to pay-in for no return. The government has millions of mugs at its disposal. It can simply divert taxes from one potential field of expenditure and put it into paying the statutory pension and guaranteed pensions to retired state employees or it can seek to raise more and more in tax to cover the cost. Neither of these courses is sustainable.

Pensions are just like shop refits or a new roof on your house. You know they will have to be paid for at some time in the future and clever people with large calculators will claim to be able to tell you how much they will cost and how much should be put aside each year to cover that likely cost. Sensible shopkeepers do not bury their heads in the sand and hope the day never arrives, nor do they expect to be able to find £40,000 lying around in the petty cash tin; they save for it, they build a pot. Sensible house owners likewise have savings because they know that one day the roof or windows will need replacement and that it will be more easily afforded from savings than from current income.

Some quite terrifying figures are in circulation about the likely future cost of pensions for government employees and equally scary figures for the cost of funding the statutory old-age pension. There is one reason and one reason only why there is no pot to pay for the statutory pension and only limited pots to pay for employees' pensions. Government took the money, by way of National Insurance contributions and deductions from their employees' earnings, and spent it on other things because they thought there would be votes in it. They didn't look to the future beyond the next opinion poll and the next election. Both parties are guilty because they have both done it.

Will either have the guts to tell the truth and say that it is necessary to put aside a substantial chunk of tax income each year to provide a pot to pay future pensions? It will be very expensive and might take a decade or more, but it needs to be done.

Thursday, 11 March 2010

The truth from the shop floor

Yesterday I watched an interesting television programme about the John Lewis business. For anyone who doesn't know, John Lewis has department stores and a grocery business called Waitrose. It is not a limited company but operates as a partnership in which all its employees have a stake. Perhaps because of its unusual ownership structure it was chosen by the BBC to be the subject of a fly-on-the-wall type of show in which the state of the business is being examined as well as day-to-day operations in some of its shops.

One theme dominated the first edition, namely the effect of the recession on retail trade. A compelling difference was apparent between the attitude of the head honcho of John Lewis and the position adopted by politicians of all parties. He expressed the view that recovery from recession will be slow and that he did not expect the spend-spend-spend years to return. Politicians seem unable to recognise this obvious truth, or if they do recognise it they don't seem to want to say so for fear that it might not be what the electorate wants to hear. It is, however, of fundamental importance if the path out of recession is to be realistic and sustainable.

I can illustrate the point simply by reference to my favourite emporium, Mr Patel's Merrymart. Mr Patel was ticking along just fine. He worked in the shop together with three other full-time staff and four part-timers. The business neither expanded nor contracted because it was what it was, it paid for Mr Patel and his loyal staff for a decade with no real variation year-to-year. All of a sudden customers had a lot more money to spend because they had borrowed against the perceived value of their homes. Sales were rocketing which required Mr Patel to take on extra staff, one more full-time and two more part-time. And here's the important bit - he took them on only because he had to and he only had to because the shop became much busier. Then customers stopped borrowing and started repaying what they already borrowed. Turnover at the Merrymart fell to below the level before the boom. The new staff lost the jobs they had been in for three years of boom and one of the old part-timers had to go.

How do you measure the decline in Mr Patel's business? Is it realistic to treat the boom times as a true level of business and to compare the new situation to those times? Or is it more realistic to treat the previous decade as the true "par value" and the boom as a blip? To my mind the answer is obvious. For three years the shop benefited from additional business that could not be sustained over the long term. It was nice while it lasted, but the shop is what it is; it is a small shop with a small catchment area. Run well it could always expect to provide a living for a certain number of people. For three years there was an upward blip. Now, as potential customers pay £50 a month to Visa rather than putting in his till, Mr Patel will find his takings fall below par value. Over time it is realistic for him to expect sales to go up as credit is repaid and the extra £50s come his way.

When an economy has been boosted in an unsustainable manner by an orgy of borrowing and spending it is inevitable that GDP will rise. When the tide turns and GDP falls people wring their hands and wail "recession, recession", as though it is necessarily a bad thing. In one way it is bad because all the additional staff taken on by businesses like the Merrymart find themselves drawing benefits when previously they had work. What cannot be ignored, however, is that they had work only because of an entirely bogus and unsustainable increase in business activity. Similarly, increased tax revenues during the boom years were illusory. They appeared as numbers on a computer screen but they were only ever temporary. A reduction in business activity was always inevitable because it was always inevitable that the added sales made with borrowed money could not continue indefinitely.

The true level of GDP, like the true level of sustainable business for the Merrymart, is not defined by a temporary upward blip any more than the true level of someone's annual income is defined by a once in a lifetime win of £5,000 on the lottery. You earn £30,000, you win £5,000, in the year of the win your income is £35,000, yippee; but next year you are back to £30,000 again. It is not realistic to look on this as a reduction in income, the substantive position is that your income has remained static but you received a one-off lucky bonus.

The boss of John Lewis understands this. He knows his business got lucky when people borrowed money and stuffed it into his tills and that he should not expect to get lucky again. He measures performance now not against the lottery years but against the real, stable, sustainable years. Front bench politicians of both parties (with one exception) have not recognised this truth openly. They measure current GDP against GDP in the lottery years and claim to have policies to bring back those heady days. It isn't going to happen. The wise exception is Ken Clarke who recently called for a shift in the whole structure away from credit splurging and towards saving and paying your way. Such a change will mean setting sights much lower and accepting that any given measure of GDP is not a minimum standard for future levels of business activity.

Once you acknowledge that poor Gordon's boom of doom was a blip giving rise to misleading headline figures for GDP and misleadingly high levels of tax revenue, it becomes obvious what must be done now. Expectations must be changed and budgets must be set according to what is sustainable in the future not according to some fairy-dusted period of fictitious wealth. Of course the recession is affected by factors other than the end of the credit boom, but that is no reason to pretend that the business created by the credit boom will reappear. It won't. Mr Patel knows it. The boss of John Lewis knows it. Ken Clarke knows it. I would suggest that every fair minded observer of matters economic also knows it.

We have witnessed a fall in GDP of somewhere between 5% and 6%. But that is a fall from a false high level because part of the starting measure was unsustainable and would have disappeared anyway once people stopped borrowing and started repaying. Whether that is 0.5% or 3% or somewhere in between is anybody's guess. For so long as politicians pretend that the credit boom represented real and sustainable business activity we cannot expect them to put forward a credible path to recovery.

Wednesday, 10 March 2010

What's so special about coral?

It is suggested by some that non-existent global warming will cause carnage to coral reefs. There has been mass panic among the tree huggers when reports have come of some part of a coral reef dying, and silence when another part of the same reef grows by more. Screams of anguish are heard at the thought of coral being bleached by some mystical process associated with keeping our homes warm and our people fed. What I want to know is, why?

As I understand things, coral has not existed since the world began. At some time, I care not when, it formed. Before then there was no coral. And you know what? The earth still turned and the sun still shone despite coral being an unknown substance. And you know what else? There hasn't always been the same amount of coral in the same places. Are you shocked? Of course you are because you are delicate souls who cannot bear the thought that something was once different from how it is today. Let me shock you again. The aquatic creatures that make their homes in and around coral reefs haven't always done so.

Coral is nothing but an underwater fluffy bunny. Latched onto by the wet non-thinkers as a poster child for their latest scenario of doom. We mustn't do anything nasty to fluffy bunnies because they are, well, fluffy. We mustn't do anything nasty to coral because it is wholesome and pretty, just like a fluffy bunny.

Fluffy poster children are essential to the cause of the doommonger. He will get nowhere by saying "global warming will cause the death of millions of scarlet lily beetles and wasps". The whole world would stoke up their coal fires. He needs a fluffy victim to point to so that we feel guilty. Frankly, I couldn't care less about coral. I have no desire to see it destroyed for the sake of destruction but if the cost of feeding people and keeping them warm is that a bit of coral somewhere suffers adverse consequences, so be it. It really doesn't matter. Any displaced water dwellers will settle elsewhere in the same way that their ancestors left their previous habitat and moved to the coral. That it will cause wailing and gnashing of teeth among the tofu-knitting community would be an added bonus.

Far more likely, of course, is that the threat to coral from industrial activity is as illusory as the threat to Arctic and Antarctic ice, to Himalayan glaciers, to polar bears, to Saharan water and to the volume and intensity of hurricanes. All the direst predictions have been exposed as either exaggerations or plain lies. So, I predict, is the position relating to coral. Perhaps I am wrong. Perhaps one of the fluffy poster children really is endangered. I'm not expecting any of the doommongers to risk a penny of their own money betting on that being the case. Nonetheless, even if they are correct I still ask, "so what"? It really doesn't matter, it is just something some people think is pretty and which is given an elevated a status in the emotions of the vapid. There is absolutely no need for any fuss.

Pyramid or Ponzi?

Someone called Kevin Foster has been convicted of a range of offences of dishonesty arising out of his business activities. It is reported by the BBC to have been a Pyramid scheme and referred to by the head of the Serious Fraud Office as a Ponzi scheme. Why the different descriptions?

The classic Ponzi scheme was devised and operated by a chap called Ponzi. Who'd have thought it. He persuaded people to pay him money by representing that large profits were to be expected from the investments he made. The principle behind it is very simple.

In Year 1 he gets, say, £1,000 each from 100 different investors, a total income of £100,000. He spends £60,000 to fund his lifestyle and puts the other £40,000 on deposit at the bank earning a little interest. At the end of Year 1 he announces a profit of 20% on the Year 1 investments and pays £200 each to the original 1,000 investors. This costs him £20,000 but he held back £40,000 so he can cover it. They are told they have the option of withdrawing their original investment or leaving it in place and receiving further huge profits in Year 2. Some cash-out but the vast majority like the thought of easy money so they leave it in place. Meanwhile further investors are putting in £1,000 each because they have heard of the success of the scheme.

Year 2 rolls on with the organiser living an even more comfortable life because far more mugs are throwing money at him than in Year 1, but still he holds some back to pay the Year 2 profit and to reimburse anyone who wishes to withdraw. Part of the trick is to minimise pay-outs by persuading punters to leave their annual dividend in the scheme so that it too can earn profits. In Year 2 the fraudster will have to make some payments but he is receiving so much from eager investors that it can be afforded easily.

And so it rolls on. For as long as there is enough coming in from new customers to cover the cost of withdrawals and fund the fraudsters lifestyle he continues the operation.

Of course eventually the day comes when there are too many calls for repayment and the scam is exposed. This is usually caused by a combination of two factors, (i) the fraudster getting too greedy and taking too much for himself and (ii) some external event, such as a recession, that causes people to liquidate investments.

A Pyramid scheme is similar but not identical to a Ponzi scheme. The classic Pyramid scheme does not promise a profit from anything the originator of the scheme does, instead the profit comes introducing new business to the originator. The originator elicits "investments" of, say, £1,000 on condition that a return will only result from introducing further investors. The promise is along the lines of "once you have introduced people making £10,000 of further investment you will receive a commission of £100". So Mr A pays over £1,000 and finds ten gullible friends to do the same. He is then repaid his original £1,000 plus £100 commission. If he wants to, he can make a further £1,000 investment and introduce a further 10 foolish chums in order to make another £100 profit. In order to entice people into the scheme representations are usually made that the funds are invested and the £100 commission can be described in various ways; but always the ability to withdraw your cash and profit is dependent on you introducing a minimum number of further "investors".

As in a Ponzi scheme the originator of the Pyramid scam receives money but doesn't do anything to make a profit for anyone other than himself. Both types of scam last for so long as new people pay-in and few people cash-out. The most professionally organised examples involve bogus accounts for fictitious overseas corporations so that there is fine looking paperwork to deflect attention when some awkward bugger asks questions. These schemes can operate for many years but they always eventually collapse because something happens to cause more people to ask for their money back than there is money to pay them.

Although both types of fraud involve taking money from new "investors" to pay profits to existing "investors", under a Ponzi scheme the alleged profit is triggered by the brilliant investments made by the fraudster whereas profits in Pyramid schemes are triggered by conditions about investors introducing new people to the game. Whether Mr Foster operated a Ponzi or a Pyramid scheme, the result is the same - chokey.

Monday, 8 March 2010

We must avoid the Japanese problem

Anatole Kaletsky wrote an interesting piece in the Times today highlighting the Japanese problem. In an attempt to stimulate its way out of recession in the early 1990s Japan increased government spending and borrowed to pay for it. This went on for several years and now, almost twenty years later, the cost of servicing the borrowing is so high there is no additional money available to repay the principal sums borrowed. Japan's economy has, as a result, seen virtually no growth in GDP.

In effect the "spare" money that could have fuelled growth has been used paying interest on the massive sums borrowed. There should be no surprise in this because growth comes from the bottom up it is not created by government. It comes from individuals and businesses exploiting new ideas and new processes, almost always that requires an initial injection of capital and weekly costs of production. Reduce the amount of available capital and/or add to the costs of production and even a half-wit can see that new ideas and processes will not get off the ground to the extent they could. It doesn't actually make any difference whether the factor reducing available cash is taxes or any other alternative use of the money. A business owner who takes a massive salary and spends it on expensive booze and cheap women, or cheap booze and expensive women, reduces his ability to invest in the business in just the same way that a government taking the same sum in tax reduces the ability of the frugal factory owner to expand. The difference, of course, is that the spendthrift owner can console himself with happy memories and a trip to the clap clinic.

It by no means follows that every government that borrows vast sums in a vain attempt to prop up its national economy will find itself trapped in the long term as Japan is trapped today. However, the trap will always arise if there is no political will to reduce borrowings. That is where we have a real problem in the UK. Decades of brainwashing the masses into believing government has a magic money tree combined with a decade of making as many people as possible directly dependent on the state for their ability to put food on the table, results in upwards of one third of those polled saying they plan to vote Labour in the coming election. More than that, it makes the Conservatives too scared to tell the truth about the need to slash government spending because their focus groups tell them it will be a vote loser.

Poor Gordon and the hapless Mr Darling tell us government spending should not be cut this year because it will have an adverse effect on demand and will upset prospects of recovery from recession. Occasionally they say reductions can be made from 2011 onwards, but if their current reasoning is sound it will apply until a strong recovery is underway and there is absolutely no guarantee that that will happen next year or the year after or the year after that.

The one thing that is an absolute certainty is that we either follow Japan or we pay back some or all of the borrowings. Actually something else is certain. Whether we retain the debt and pay buckets of interest or reduce the debt by paying a combination of interest and principal, the money used cannot be used for anything else. Debt is a millstone around the neck of a national economy just as it is a millstone around the neck of individuals, indeed it is a millstone around the neck of a national economy precisely because it is a millstone around the neck of individuals. That is because, in reality, there is no such thing as a national economy. There are millions of individual little economies comprising each separate business and household and the combined value of them all is what we call the national economy. It is actually no more realistic a notion than the economy of Sussex or the economy of Acacia Avenue, it is simply a statistical construct. The real economy is the millions of businesses and households.

Mr Ordinary with a disposable income of £20,000 can spend £20,000 or he can save some and spend the rest, or he can invest some in a business venture and spend the rest or he can split his money three ways with some spending some saving and some investment. Whatever he does he can only dispose of £20,000 because that is all he has. Take £3,000 from him to repay debt and his choices are the same but with an overall limit of £17,000 rather than £20,000. There are knock-on effects of his choices which operate in much the same way as fractional reserve banking. If he spends £20,000 at Mr Patel's Merrymart, Mr Patel makes £5,000 profit which he then spends at Mr Khan's Kurdish Kasbah, Mr Khan makes £1,000 profit which he spends at Madame Fifi's Sauna and Hanky Panky Parlour, in turn Madame Fifi and the girls receive money they spend elsewhere. When the amount entering Mr Patel's till falls from £20,000 to £17,000 so Mr Khan receives less and one of Madame Fifi's girls misses out on business. The national economy is depressed because the individual economies of Mr Patel, Mr Khan, Madame Fifi and Tiffany the trainee tart are depressed, as are those of all the suppliers to Mr Patel, Mr Khan and Madame Fifi.

In other words, debt depresses the economy. It also boosts the economy for so long as the principal sum borrowed is sloshing round the system. Thus, Mr Ordinary could borrow £5,000 at 10% and have £24,500 to spent at the Merrymart thereby increasing Mr Patel's profit, and Mr Khan's and Madam Fifi's and that of the manufacturers of intimate rubber items. But that can only happen once. The key question is whether the boost provided by an injection of borrowed money outweighs the depressive effect of reduced disposable income in future years.

Japan illustrates that too much borrowing can lead to a long-term depressive effect far in excess of any short-term benefit. It is a self-perpetuating problem because the only way out is to increase GDP but that requires "spare" money and there is no spare money because of the need to pay interest. There is only one way out of this spiral of stagnation, it is to reduce taxes and other costs that government imposes on business. No other course has the potential to raise GDP because GDP can only increase through profitable business activity. In the short term that might lead to a need for further government borrowing to cover the reduction in tax receipts, although that can be ameliorated by paring back government activities. Even that short-term problem is by no means a certainty because marginal businesses will become profitable instantly, already profitable businesses will become more profitable and new ventures will pay tax from their first day.

Given the choice between (i) cutting government costs and taxes now and taking my chance on it producing a quick benefit and (ii) maintaining taxes and state spending in the hope that GDP will expand to pay for it, I would go for the first option every time. It involves uncertainty but to that I say "so what?" Just look at the track record of private business for expanding, creating jobs and making taxable profits. You don't need to be able to identify exactly what businesses will make what profit to know that reducing overheads will make business more profitable and create new jobs. None of it will be by direction of the government, it will all be the result of government getting out of the way.

It is the only certain method of avoiding the Japanese problem.

We must shed the public sector of pointless managers

When I read a headline proclaiming an impending strike by civil servants I had no idea what it was all about. On reading the article I discovered it is all about redundancy pay. My chubby little heart was lifted by reading that five of the six trade unions representing civil servants had agreed to a change to the redundancy pay scale and only one was holding out against the plan. Under the new proposal civil servants will be entitled to far more than the statutory minimum, albeit less than their previous contractual entitlement. It looks like most of the unions have recognised the reality of an empty governmental purse.

It might be a different matter once the need to reduce government spending substantially becomes policy rather than a plan for some undefined time in the future. There are all sorts of ways one can look at the figures. I prefer a simple approach to match my lack of depth. Government spending, c£600billion; government income c£450billion; answer = reduce spending by c£150billion. There, nice and simple.

I doubt that anyone sees throwing people out of work as a good in itself save, perhaps, when the people concerned are politicians. Some of us are very keen to see every five-a-day advisor, carbon footprint assessor and street football consultants to be out of a job, but it has nothing to do with wanting to see the individuals on the dole. Instead it is all about the jobs they do. They are non-jobs, they suck money from the productive side of the economy and deliver nothing of value; they represent spending for the sake of spending. The need for redundancies is far from clear, however.

The public sector has a large turnover of staff each year. One way to reduce staffing costs without sacking anyone is to use staff currently in non-jobs to fill vacancies as they arise in the parts of the public sector which actually do something useful. This will take careful and sensitive management but there is no reason in principle why an administrative assistant in a five-a-day advisory department could not use their skills in a court office or a hospital office or a tax office when an existing member of staff leaves. Of course it is unlikely that a satisfactory position can be found for everyone working in the non-value-added areas of the government machine, but there is no reason to believe that vast numbers cannot be transferred happily from one department to another. After all, if someone leaves a court office to take a job in the private sector they are simply transferring their skills from one work place to another; there is no difference in principle between that happening and someone else moving from one government office to another.

The "natural wastage" that arises every year through retirement and resignation does not always require new people to be brought into the fold. Identifying the areas of the public sector that are mere political fripperies allows the people currently employed there to be available to fill other vacancies.

That is not to say there will not be an adverse consequence on overall levels of employment. By definition, abolishing one role and using the person who filled that role to fill a vacancy elsewhere that would otherwise have been filled by taking someone off the dole leads to one fewer person being employed overall. But given the need to save £150billion (on my simple figures) the overall number of state employees will have to fall considerably.

Transferability of state employees is almost certainly easiest where the job is not technical, particularly where it is purely administrative. The greatest risk of redundancy is probably not in the paper-pushing side of things but in wholly unnecessary management roles. The management of departments often requires knowledge and skills that are particular to that department and are not easily transferable. Where the department is a waste of space the manager cannot expect to find another position in the civil service as easily as his secretary and the army of people who deal with mundane paperwork. The time has come, however, when the pointlessness of their department must be acknowledged and they will go the way of countless people in the past who had skills and knowledge that was no longer of any use. If they can be used elsewhere, so be it. If they cannot then it must be "thank you and goodbye". I hate to think how many people are employed in these positions at salaries of £40,000 and above (plus pension, plus car plus this plus that). A huge saving is possible if only someone finds the guts to say "sorry, your job achieves nothing".

It is worth noting that almost all non-jobs have always been non-jobs. I am not talking about the modern day equivalent of the brick maker whose skills were made redundant by mechanisation of the brick-making process. I am talking about the man with the flag walking in front of early cars to warn people that a motor vehicle was approaching. That was a non-job, created out of an abundance of caution about a risk that never existed. So it is with every public sector job concerning so-called "climate change" or haranguing people about what they should or should not consume, and so it is also with the countless talking-shop Quangos including those with "Regional Development" in their title.

Such of their staff who have skills useful elsewhere should be redeployed. It will save money without causing them to lose a day's pay. A big saving will be made by disposing of the highly paid but utterly pointless managers.

I did a rough calculation earlier today. It concerned a local shop that is suffering badly despite being run extremely well. There are two owners who both work there, three other full-time staff and five part-timers. Assuming all the employees are on £7 an hour and the owners draw £30,000 each (if takings permit that much), the income tax and National Insurance produced by that business in a year is roughly £25,000. Five full-time and three part-time workers work all year to pay the cost of half a senior climate change manager.

If the unions oppose such redundancies they should be shot.

Sunday, 7 March 2010

Good judgment need not be rational

I have commented before that juries might reach a unanimous verdict for a range of different reasons. Of the twelve people on the jury perhaps two think the defendant really is innocent, two think he is probably guilty but that his guilt has not been proved beyond reasonable doubt, two think him guilty but don't like the way the police investigated the matter, two think him guilty but don't want him to become a martyr for a cause they detest, two know he would be sent to prison if convicted and think that would be too harsh and two simply don't care so they go with the flow. We have a strict law against investigating or disclosing the workings of the jury room (although the occasional study is allowed). The cynical might suggest the law exists to prevent the lack of rational thought of the average jury being exposed to public knowledge, I prefer to look at it rather differently.

People are not entirely rational. Some are wholly irrational under all circumstances. All have personal opinions and emotions that affect their judgments. People come in all levels of analytical ability and all levels of balance between the weight they give their emotional and rational reactions to situations. Everyone who thinks about it for a second will understand that juries must always comprise a mix of people of differing intelligence, attitudes to the police, opinions about the type of offence the defendant is accused of committing and dozens of other qualities that will affect the decision they reach.

One reason we have juries to decide the guilt or otherwise of someone charged with a serious offence is because someone has to decide and it is thought better that it should be a random-ish cross-section of the public rather than a middle aged bloke in a wig. In the early 1990s I was involved in a series of trials concerning an organised fraud. It shed interesting light on the weight that should be given to a jury's verdict.

A property developer was building a load of new flats and houses just as the property market started to fall in 1989. Many developments are undertaken without sufficient capital to pay for the building of every unit. What you do is get some units finished as quickly as possible on one part of the site and market them. Some purchasers might have bought "off-plan" even before the places were built and the other units are marketed in the conventional way. This brings in money which is then used to complete the next tranche and so on until the whole development is completed. The developer will have spent a lot of money up-front buying the land, engaging architects, securing planning permission, arranging for the supply of utilities and paying for the creation of new road junctions so that the site can be entered and exited safely. The properties themselves also cost money to build. These costs can only be recovered by selling the new properties and it takes a lot of sales to cover them. The developer only makes a profit on the last tranche of properties, the first 75% or more just reimburse costs he has incurred.

The difficulty for the developer in my case was that the crash in the market meant he simply could not sell enough units for a high enough price to cover his costs. There were buyers at a price, but the price was not high enough. What he did was to find friends and relatives to act as bogus buyers. They applied for loans from finance companies that asked for few if any checks of their ability to pay. In order for the scam to work he not only needed helpful bogus buyers, he also needed the help of a mortgage broker who wouldn't ask any questions and a surveyor who would give generous valuations in a falling market. Once a sale was made the developer received the cash and the bogus buyers never repaid a penny. In due course numerous properties were repossessed and sold for a fraction of their purchase price just a year or so earlier.

The developer and several of his cohorts were prosecuted for conspiracy to defraud. They were also sued in the civil courts for the money they had extracted from the finance companies. The criminal trial came first. Some of the accused were convicted but not all. When the civil trial came to be heard the judge was faced with claims being made against alleged conspirators who had been acquitted after a lengthy criminal trial. On the first morning he asked how he could find against those who had been acquitted by a jury. The answer given was technically correct - the jury had to be satisfied beyond reasonable doubt whereas the judge in the civil claim only had to be satisfied on the balance of probabilities. Then the judge threw in the killer blow. He asked how he could know that the jury was satisfied of guilt on the balance of probabilities and acquitted only because the higher standard of proof required in a criminal court had not been met. Of course there was no answer to that. He took the view that it would be perverse of him to find, on the balance of probabilities, that someone had acted fraudulently if a jury had not been satisfied of that fact to that standard. Since acquittal did not establish that the jury was satisfied on the balance of probabilities he was not prepared to second-guess their judgment.

Interestingly, that judge had never been involved in a jury trial either in his years in practice at the Bar or in his time on the bench but that did not leave him with a sense that his judgment on issues of fact that will affect a person's whole life was better than that of twelve people picked off the electoral roll. He actually said that he saw no reason why his judgment on issues of fact should be any more accurate or any more just than one reached by a jury. In my experience that is a view held also by judges who deal only with criminal cases, indeed many have told me exactly that.

There is nothing to balance the emotions and opinions of a judge sitting alone other than his ability to leave such matters to one side and seek to be objective. All sorts of balancing factors apply to a jury of twelve people seeking to establish a unanimous verdict. And more, you might have identical jury trials a decade apart resulting in different verdicts because the general sway of public opinion has changed on a matter.

The danger with trial by judge alone is not just that it is only one person reaching an important decision but also that reaching just decisions almost always requires value judgments to be made and values in a dynamic society are never set in stone. It is more difficult for one person, who is obliged to give reasons for his or her decision, to reflect current values than it is for a dozen whose reasoning is not open to scrutiny.

Friday, 5 March 2010

Luck prevents equality

It's not easy to know whether some people are lucky and some unlucky. I can point to examples of people I have met who seem always to land on their feet and others who get the rough end of the deal more than half the time. In fact I once met someone who had won both the jackpot and the second prize on the national lottery, albeit not on the same day. One might be inclined to think that person extraordinarily lucky. On the other hand an old friend of mine bought his first flat just before the massive property price crash of 1989-1992 and managed to lock himself into a fixed-rate mortgage just as variable rates started to plummet. One might be inclined to think him blighted.

If truth be told, these things are bound to happen some time so these people are statistical proof rather than statistical freaks. Good luck and bad luck happen to us all at different times of our lives and I am sure it is a matter of pure chance whether our overall score in the luck casino is positive or negative. That is not to say that you cannot affect your chance of good things happening. For example, working hard and being polite both bring rewards that are not received by the indolent and rude, but that is nothing to do with luck it is a matter of cause and effect. Luck is a very different thing. It is all about factors that are beyond your control.

I am sure I have been very lucky in my life. Three examples spring to mind.

When I was first called to the Bar I couldn't afford to go into pupillage (the year-long apprenticeship you have to undertake in order to be able to practice as a barrister) because it was unpaid in those days and I had no money. I was taking a medicinal beverage one evening and overheard someone say that a particular private law college regularly recruited new lecturers at that time of year. I applied and was given a chance to prove myself. Had I not been at that particular watering hole on that particular evening and had I not been within earshot of that particular conversation, it doubt that I would have even thought of applying for the job.

After three years teaching full-time I went into pupillage and, after serving my year, applied for a place at the same set of chambers. I had one serious competitor whose support was much diminished by his strongest supporter dying just a few weeks before the decision was made whether he or I should become the junior practitioner. Had that man not died I suppose I might have been chosen anyway but my passage was eased by an event entirely outside my control.

In 1993 the London property market was at rock bottom. Two of my best friends owned the property that is now FatBigot Towers and needed something larger. They found the perfect place not far away so I helped them by buying their old shack. Since then the market has shot up to a level that is, to my mind, utterly absurd. Nonetheless, by being in the right place at the right time I have a capital asset with a current market value far above what it would otherwise be. And, to add a further twist, the government's desperate desire to chase the homeowner vote means policies have been targeted at maintaining artificially high prices. Were I to scale-down now, as I might, I would make a nice profit. Not so had I bought, say, twenty years earlier and faced the 1989 recession rather than the 2009 recession.

These three examples of personal good fortune highlight three different aspects of luck. The first was entirely a matter of being in the right place at the right time - the opportunity I enjoyed would simply never have appeared otherwise. The second was a matter of enjoying an advantage due to an external event that disadvantaged someone else. The third is a matter of government policy happening to benefit someone in my position whilst causing problems for others (particularly younger people who cannot afford to buy their own home). The common theme is that the events from which I benefited were outside my control.

One of the most serious flaws in egalitarian political theories is that they can only work if they negate luck. How can they do that? One or two obvious steps can be taken such as abolishing the national lottery, the football pools and all other forms of gaming and gambling. It doesn't take a genius to work out that betting will just go underground if that were done. But that covers only one aspect of the effect of luck, namely businesses that trade on people seeking luck.

Nothing can be done to prevent someone being in the right place at the right time such that he enjoys a benefit that others might be better qualified for but never hear about. Nothing can be done to combat the good fortune of a competitor suffering a blow through an external event that is no fault of his.

Everything can be done about government policies that provide a benefit to some but not others, however nothing will be done about them for so long as there are votes in that benefit. Current policies to maintain house prices at artificially high levels suit me to a tee despite being implemented without the intention to deliver any benefit to me at all. Maintaining house prices is not aimed at me, it is aimed at the potential Labour voter who bought at the height of the market and will be very angry and disillusioned to find himself with a home worth less than the amount he borrowed to buy it. Nonetheless it is not the man who borrowed £125,000 to buy a house now valued at £125,000 who gains, it is a crusty old fart like me who bought many years before, saw the nominal value of his home rocket because of the false credit boom and now sits on lots of equity because the government is scared of losing the vote of the other chap.

Policies aimed at combatting luck will always have consequences. They might prevent the chap with the £125,000 house suffering a capital loss today. That's fair enough, I wish him no ill-will. But they will maintain my windfall profit and will make no difference to the youngsters for whom a £125,000 house is a fanciful dream. Would it be fairer for Mr £125,000 to face a 25% fall in capital value while he has 20 years to pay it off or hope for an up-turn, me to face a 25% fall in capital value and the youngsters have a sporting chance to own their own home? I don't know. Maybe it would, maybe it wouldn't, I'm inclined to think it would.

Very much the same point applies to other policy areas. Combatting discrimination on the grounds of pigmentation or gender is one thing. That seeks to achieve equality of opportunity. True equality of opportunity can never be achieved because there will always be someone who overhears a job opportunity while someone better qualified does not. And there will always be someone who cannot put forward their most important reference because the referee fell under a number 23 bus just before putting pen to paper. What can be done is to level the playing field in other ways.

When you go one step further and seek to achieve equality of outcome you are doomed to failure. Not only can it never happen because different people have different abilities, but you simply cannot legislate against good or bad luck. Some idealists think you can. They think decisions should be taken by an elite group of the super-wise or be delegated to a body charged with applying the criteria laid down by the super-wise. The problem? It's obvious, those who propose the plan appoint themselves to be the super-wise - it can't be anyone else because it was their idea. They might start out with the very best of intentions but they do not and cannot have minds unimpeded by personal preferences and consciences unable too resist temptations wrapped in flattery.

Far better to face reality and accept that some people win the lottery and some don't, some make good bargains and some don't, some are in the right place at the right time and some never are. That's life.

Wednesday, 3 March 2010

Goodbye Michael Foot

So, Michael Foot is no more, gone at the age of 96. Proof that the old saying "the good die young" gives only half the story.

Reports of his death contain gushing tributes to a "man of principle" who was "true to his beliefs" and a "magnificent orator". I can't read stuff like that without wanting to bring up my dinner. Nick Griffin is a man of principle, David Koresh was true to his beliefs and Mussolini was great at stirring up a crowd, yet they are or were despicable pieces of filth who deserve nothing but condemnation for the dire effects of their principles, beliefs and oratory on other people.

Having misguided principles is not something to be lauded, sticking with them when they have been exposed to be not just flawed but dangerous is the sign of a stubborn bigot and being good about proclaiming them to the world is nothing other than the ability to show yourself to be an idiot to a wide audience.

Foot not only supported but fought for all the things that brought the UK to its knees by 1979. A fervent advocate of nationalisation, massively high taxes, limitless unions power and the destruction of our ability to defend ourselves, he epitomised the recipe for bankruptcy that our current government has fought so hard to emulate. The man's judgment could not have been more flawed. When the failure of socialist economies was brought to his attention he stood his ground like a religious zealot and argued that they hadn't done it properly ... none of them, even though every one had his support. It was like listening to a particularly stupid student union politico. He supported every major pro-soviet and anti-British movement, relentless in his pursuit of socialist dictatorship. Facts never got in the way, they never do with those who can't see beyond the hem of their donkey jacket.

Perhaps it is a little unfair of me to compare him to Griffin, Koresh and Mussolini. Support for the BNP has increased under Griffin's leadership, Labour's support was never lower than under Foot. Koresh's charisma seemed to keep the women happy, Foot kept no one happy. As for Mussolini? Well, there was absolutely no chance of the trains running on time under a Foot government.

Michael Foot was a naive failure.

Don't tune into the BBC

I hum along merrily to a jaunty tune, tap my feet at a pleasing rhythm and occasionally inflict My Way on drunken friends who are too polite to object to the use of notes unknown to musical science. That aside, I really don't do music. Others seem to take a different view, their ears permanently full of pea pods or whatever they're called. Fair enough. I don't like cauliflower but love runner beans, and others have opposite tastes. That's all part of the fun of life. If you want music constantly blaring in the background while you try to do things, be my guest, it's none of my business provided you don't either force it on me or expect me to pay for it.

Time was, not so long ago, that radio choice in music was between poppy stuff on Radio 1, slushy stuff on Radio 2 and pretentious stuff on Radio 3 with the occasional independent broadcaster trying to muscle into the Radio 1 audience. Now there seems to be an endless choice for your listening pleasure care of commercial stations catering for particular demands. Not all commercial stations pay their way and the occasional one drops off the airways because it can't attract enough advertising. No one ever seems to object because everyone knows the rules of the game - they broadcast for so long as they have enough money coming in and they stop when the money runs out. Anyone launching a petition to keep alive a loss making commercial station would be met with a simple response - "OK, you pay for it then".

It has been confirmed that last week's rumours about the BBC planning to close two of its radio stations are true, the BBC Asian Network and BBC 6 Music are for the chopping block. The BBC needs to save some money so it is cutting back on the services it offers. All very sensible, one might think. Unless you are one of the people employed on those stations or an avid listener, in which case you seem to feel obliged to howl with outrage. I know nothing about the BBC Asian Network and little more about 6 Music, although my understanding is that the latter plays music that is liked by some young people.

Why is it a loss to national culture for radio stations run by the BBC to close when it is just business reality for unfunded stations to go off the air? Of course it isn't anything of the sort. Life existed before those stations were started just a few years ago and it will continue once they are silent. This evening I heard a multi-millionaire singer bleating about the unfairness of 6Music disappearing. It was the usual guff we get from the vacuous world of pop music ... "damaging to modern culture" ... "no other way for new bands to break into the market" ... "loss of talent" ... blah blah blah. What utter tosh.

Let's get one thing straight here. The vast majority of pop music is simplistic pap. It might be nice sounding simplistic pap that will get my foot tapping, but it is still simplistic pap. The music itself requires no great musical skill to compose or play however jolly it might be on the ear. And the lyrics are fourth or fifth rate poetry if they have any meaning at all. Indeed almost all lyrics are just noise, you don't need to hear the words because they add nothing to the sound produced by the singer - which is why recordings of songs sell regularly to those who don't speak the language allegedly used by the singer and when you can't make out the words at all.

One can test this theory quite easily. How many lyrics would command attention if written as poems? What level of musical skill is required to play the tunes? Perhaps one only needs to know that a lot of it is produced by barely pubescent bands to understand that it has no sophistication. If one group of spotty youths doesn't find an audience another will and there won't be a fag-paper's thickness to distinguish between the noises they make.

If 6 Music really provides a valuable service, let someone buy the brand and see if they can get enough advertisers to make a go of it. If they can, fine; if they can't, equally fine. But it really doesn't matter one way or the other. The world will no more stop turning when 6 Music closes than it did when Dave Dee Dozy Beaky Mick and Tich broke up.

The real question is not whether BBC 6 Music should close but why the BBC spends money on music stations at all. Commercial radio covers every genre the BBC covers today and there is no reason to believe that that would cease to be the case if BBC music radio simply shut up shop tomorrow. In fact the opposite is likely to happen because it would free up further audiences for commercial radio and would increase their chances of securing advertising revenue.

There is nothing in the "it launches new talent" guff. Leaving aside the debatable use of "talent", if people make noises the gullible want to buy we can be sure as eggs is ova that the record companies will find a way to promote them. You don't need "free" advertising at the taxpayers' expense to sell a saleable product. At the moment the BBC is providing unknown millions of pounds worth of free advertising to a business that is perfectly capable of standing on its own feet.

What we are seeing in the absurd reaction to 6 Music's closure is the same belief in the tooth fairy that imbues all public-sector spending with magical powers in the view of the brainless. An "official" body is doing something, therefore it must need doing, therefore it would be harmful to stop doing it. Rubbish on stilts. Pop music is a commercial enterprise. It makes its successful exponents hugely wealthy regardless of their talent. It extorts money from the young by falsely claiming to be important, in much the same way that football does for middle aged men and cosmetics for middle aged women. Fine, let them pay if they think it's important. Let them believe it's important if that makes them happy. But don't claim it is anything other than what it is - a branch of commercial entertainment just like any other.