Archive for the ‘economics’ Category

Ralph Musgrave‘s economics blog makes a case for a program of time-limited payments to companies who hire the unemployed, although I’m not sure if Musgrave is thinking of it as a permanent feature of the welfare state rather than an emergency response to depression. I might quibble with a couple of aspects – for example, it seems possible to me that businesses might exploit it by churning workers every three months to collect the subbo as often as possible – but I think that could be mitigated with a bit of thought.

It’s all very sound, but it only misses one thing: the policy exists and it’s called the Future Jobs Fund, and it was about the first thing the coalition found to cut.

On the other hand, the archive is also full of bad ideas. I note that the pre-Queen’s Speech trailing is talking about “a British FBI” and stuffing everything you can think of into “a National Crime Agency”. This idea was repeatedly briefed out to the Sundays by David Blunkett, Charles Clarke, and John Reid, and its reappearance is a sign that the government is so directionless the circulation of bad ideas round the Home Office files is beginning to influence it. The last time they came up with it, the result was the Serious and Organised Crime Agency, and nobody seems to know what that’s for.

Further, after things like the old National Hi-Tech Crime Unit were rolled into it, fairly quickly it became necessary to re-create them at the police force level because they were no longer responsive to the needs of the police. Apparently, the problem this is meant to solve is that the immigration queues have got out of hand. John Reid decided to save the world by making immigration officers wear a remarkably, depressingly crappy uniform and putting up signs reading UK BORDER, as if wet feet or a big hole in the ground didn’t make it plain.

Now Theresa May wants to hurry up the queues by stuffing bureaucracy A into bureaucracy B. We are clearly at about 2007 in the last government’s timeline. Alternatively, perhaps we never left Late Blairism.

Balls to the Bank

Following up on intemperate twitter feuds seems to have become a theme around here. I had a lengthy set-to with Pawel Morski about voting for Ken Livingstone, in which I pointed out that Ken was right about Iraq, that in general being right about Iraq should be rewarded, and being wrong about Iraq should be punished.

This may seem like ancient history to some readers, but it is true that Iraq was an important issue, there was no profit in being right, and powerful people were insistent in bullying and cajoling people who were right and promoting people who were wrong. People who manage to be right in situations like that are worth electing.

To which he responded that I don’t have any objection to Ed Balls being Chancellor. I’m actually quite a Balls fan – he was right about austerity in 2010, another moment when the three conditions I mentioned were in force, and he seems to annoy the hell out of Tories. But wasn’t he wrong about the economy?

Well, the specific decision everyone associates with him was Bank of England independent control of monetary policy. At the same time, and as part of the same package, the Financial Services Authority was set up to take over many of the Bank’s regulatory functions in the so-called tripartite structure. The Balls-critical case is that this particular decision was wrong, and that it was one of the reasons why the banks got so bad. Interestingly, far fewer people object even now to giving the Bank control of monetary policy, partly because central bank independence was a really deeply felt and broadly spread ideology, and partly because the period 1997-2007 was actually rather prosperous and it wasn’t all chopped liver.

The Balls-critical case is strongly identified with the Bank itself. Of course it would be – tell me more about this “not our fault” idea, I find it strangely fascinating. It also implies that it wouldn’t have happened if it wasn’t for pesky kids, which appeals to Tories. It also suggests that things would be different if the Bank had kept more powers and more staff, and this obviously appeals to any institution. Anyway, here is an excellent profile of Mervyn King and the Bank as he thought it from the Financial Times‘s Chris Giles.

To say the least, it does not sound like the King-era Bank was going to stop the bubble and restrain the banks if it weren’t for that terrible man Balls. It sounds a lot more like just what it says, that the Bank’s remaining responsibility for financial stability in general was not taken seriously, that it was a Siberia assignment, and that Mervyn King personally was convinced that markets were perfectly efficient and nothing could possibly go wrong. Further, the idea of the central bank being a “monetary policy only” institution was King’s as much as anyone else’s, and he took steps to staff and organise it as such.

It’s possible to argue that the whole shape of British economic policy was wrong and Balls shares responsibility for that. However, even if he didn’t forecast the storm, he did realise the weather had changed, unlike the Bank which kept the sails set just as they were through 2008. And he was also aware that we might only be passing through the storm’s eye in 2010, rather than (like King and the Bank) clapping himself vigorously on the back.

Just to recover something from my twitter feed, last Friday, BT announced its Q4 results and (among other things) its management said that they were scaling down their capital investment plans, and that one of the reasons was low interest rates. What? Well, as a UK company BT has to capitalise the net surplus or deficit in its pension fund every year and take a charge to profits for it. As pension funds have to hold a lot of bonds, low interest rates mean a bigger notional pension deficit. Whether or not BT has to put more cash into it, or whether it might just be more expensive to raise money, doesn’t really matter. The impact is the same, completely counter-intuitively. Lower interest rates shouldn’t discourage economic actors from undertaking capital projects.

A couple of things as a result. One, this tends to support the idea that there is no such thing as an economy-wide (Wicksellian) interest rate. If BT’s pension fund were big enough, lower interest rates on its bonds might actually drive up rates on BT’s own borrowings. Two, what about other companies? US firms often have big health insurance liabilities, and insurers typically have to own lots of bonds (and it wasn’t the insurers that blew up, now was it, so best not fiddle). Do they experience this? Three, this may not be a thing as it may just be management spinning a pretty dreadful quarter, and Verizon in the US, a very similar business, decided to go ahead and lay a lot more fibre.

Via Jamie Kenny, a must-read translation of a Chinese investigative report into the case of Wu Ying, a Chinese businesswoman who is in deep trouble with the law. What’s interesting here is that the report provides a deep view into some of the most important interfaces in the political economy of China – between the official and shadow banking sectors, between both and the Party, and between the Party and organised crime. It’s been suggested by quite a few people, notably Ken Livingstone’s economic advisor John Ross, that Chinese macro-economic policy is basically all about investment – whereas other countries might target inflation, the money supply, nominal or real GDP, an exchange-rate peg, or full employment with a range of fiscal or monetary tools, Chinese policy makers have a primary policy target of maintaining sufficient employment growth to keep up with the growth of the urban workforce, and a primary policy tool of controlling the rate of capital investment. This is achieved through a combination of fiscal policy through the government budget, both formal regulation and informal influence over the banking sector, and monetary policy, specifically the management of the RMB exchange rate and the terms on which central bank intervention is sterilised or not.

An investment-centric view of the economy could be characterised as both palaeo-Keynesian – investment, driven by animal spirits and radical uncertainty, is the swing item in the national accounting identity and therefore the driver of the business cycle, and should be managed by government in order to maintain a stable growth path – and also Marxist, in that it puts the accumulation of capital and its allocation between sectors centre-stage and suggests that it’s too important to be left to capitalists.

An alternative view, which we might pin on Patrick Chovanec, is that investment is the driver of the Chinese economy but that nobody’s in anything that could be described as control. In this view, Chinese economic policy is more orthodox, leaning against the world recession in 2009 with a major stimulus plan and a monetary expansion, but its impact is very noisy. Much of the stimulus money went into an unsustainable property bubble, which is now deflating messily.

In a sense, these arguments are not all that different. The major differences are the degree of agency the central government is perceived to have, and the underlying call on the future of the economy. John Ross would argue that the surge in investment is creating the capital goods needed for future growth and removing inflationary constraints. Some Americans wonder at the system’s capacity to pour money into a massive windpower infrastructure. On the other hand, the San Francisco Fed reckons that a very large proportion of Chinese goods exported to the US consists of imports to China, notably from the US – it’s been estimated that out of the production cost of an iPhone, more of the value-added represents US than Chinese production. Isn’t this strong evidence that there has been huge overinvestment in a very particular kind of low-margin export processing, plus property?

Now, back to Wu Ying’s cell. This story is all about how the system tries to control investment, how Chinese entrepreneurs and officials try to subvert this control, what happens when it breaks down, and how it is then restored. It’s fairly typical of economies with strong official controls on bank balance sheets that a big market in direct inter-company lending develops (it happened in post-war Britain). If you can’t get a loan from the bank, perhaps you could arrange something with a business that happens to be awash with cash. Obviously, this is a lot easier if there is some sort of intermediary who can make the deal. And in China there are specific, geographically linked networks of entrepreneurs who have become specialised in this unofficial shadow-banking sector. Technically it is entirely illegal, so it’s up to the intermediary to enforce the terms of the contract in their own sweet way. Which of course brings in another actor, organised crime or privatised protection.

This being China, though, it’s more complicated than that. Wu Ying’s creditor, Lin Weiping, was a former Cultural Bureau official turned moneylender or rather “funding coordinator”, who acted as a sort of broker between savers and borrowers. Well, it started off like that but the business prospered and pretty soon people were depositing spare cash with him overnight. This is an important moment – he wasn’t just introducing the two parties to a private arrangement any more, but rather, he was now operating a bank. The demand for credit outside the official system, and for high-yielding (2-5% monthly interest) deposits, was enormous. Fascinatingly, it turned out that the official banks were also keen to find sources of wholesale funding that let them get around the People’s Bank of China’s monetary policy – they started borrowing from him on overnight terms. This was implemented by sending a straw-man to open an account and deposit the cash. Lin, having turned himself into a bank, now went a step further and became a central bank. You might wonder how long it would have taken him to start issuing his own currency.

But Wu Xing would bring him down. He very rarely extended credit outside his home province, but made an exception for two of her projects, a tourist resort and another unofficial banking operation (which he may have thought of as being a branch of his own). It turned out, though, that she actually had an entirely different project in mind, in real estate. She justified this as necessary to influence important officials. In fact, the story was about to become a classic case of an entrepreneur who over-does the leverage and eventually runs out of credit, with the twist that one lot of creditors had her kidnapped by thugs in an effort to collect payment. However, Wu had become too big to fail, and eventually there was something like a race between Lin’s shadow-banking empire and the very official Agricultural Bank of China to put together a lifeboat package, which Lin eventually won. A syndicate of unofficial lenders bought out the loan portfolio at 70% of its face value.

It seems that this was intolerable to the authorities, as Wu and Lin and many others were then arrested. Lin got six years and is now back on the out and apparently dedicated to studying Chinese culture, specifically the bits relating to keeping his mouth shut. Wu is still in the court system, facing charges of running an illegal bank.

Chinese regulators quoted seem to be more interested in the sources of capital going into the shadow-banking system, on the grounds that quite a lot of it is deeply illegal in nature, and also that concentrated rather than diversified sources of funding tend to cause systemic risks. In so far as it’s the marginal transaction that matters, if this was to work it would represent an effort to make sure that it’s the official financial sector that represents the marginal lender and that state control of investment continues.

But that’s going to be very difficult in an environment where the central bank might be you.

Dear Lazyweb, has anyone seen a data series showing the forecast for the UK government budget? Or will I have to download all the Treasury statements and re-chew it?

Update: I originally didn’t want to publish this because I didn’t think it was good enough, but I hit the wrong button. Anyway, Alistair Morgan read it and thinks one of the premises of the whole thing is wrong. Namely, the weapons were going in the same direction as the drugs, not the other way around. Well, at least the story moved on a bit, but this renders mostly useless a whole additional post I put together from reading a lot of crazy-but-interesting stuff out of the bottom of the Internet. Also, despite the Jessie J reference there’s better music at the bottom if you get that far.

So, Alistair Morgan’s twitter feed frequently hints at “cocaine, weapons, and Ireland” as well as police corruption as being factors involved in the case of his brother, Daniel Morgan, the private detective murdered in 1987, probably by people who were since employed by News International. It’s often been said that Morgan was on the point of publishing some sort of huge revelation when he was killed, but nobody knows what it was beyond his brother’s hints based on what the police told him at the time.

Since the eruption of the phone-hacking scandal, a number of sidelights have come up which linked the News of the World, its cadre of ex-police gumshoes, and its contacts inside the police force. Notably, it seems to have spied on the former Army intelligence agent-handler, Ian Hurst, on an NGO, British-Irish Rights Watch (because documents of theirs were on Hurst’s computer when they hacked it), and perhaps on the chief of police, Sir Philip Orde. It would have been hard for people working for the press not to have covered at least one Northern Irish story in the last 20-odd years simply because it was such a news staple, but it’s worth noting their interest.

The War Economy of Northern Ireland

So, what might link Morgan, cocaine, weapons, Ireland, and policemen? There are some fairly well-known stylised facts or stereotypes about the economy of the Troubles. The IRA mostly funded itself from money collected in the United States, from bank robberies, and from unofficial taxes it collected in the North. It also got contributions from friendly countries, specifically Libya. The Loyalists didn’t have a reliable source of their own money abroad like NorAid, and so specialised in protection and drugs. Both sides also got involved in smuggling across the border as a commercial exercise.

That’s a glib summary ‘graf; obviously, I collect a revolutionary tax for the struggle, you impose fines on drug dealers and dishonestly stick to some of the money, and they are merely thugs operating a protection racket. Traditionally, both Sinn Fein and the British tended to stereotype the Loyalists as basically criminal and the IRA as proper insurgents – there may be some truth in there, but the distinction is one of emphasis and degree and also of propaganda rather than of kind.

Having obtained money, they both needed to convert some of it into arms. The IRA got a famous delivery in the 80s from Libya in its role as Secret Santa, and also often bought guns in the US over the counter and smuggled them back. I don’t know how well characterised the sources of Loyalist arms are, which of course gives me license to speculate.

Permanently Operating Factors

Now for the cocaine, which has often been known to land in bulk quantities on the wilder, less populated bits of the Atlantic coast that also offer good harbours. This is a rare combination, as people live near ports. Two of the best bits on that score are northwest Spain and southwest Ireland. Having landed, you can move it on anywhere in the UK-Ireland common travel area without much more trouble. Since the creation of the Schengen area, Galicia is even better for this because there is such a choice of markets you can reach without a customs inspection. But in 1987 this was an un-fact, so you might as well go to Ireland.

This transit trade had important consequences – notably the rise of Martin “The General” Cahill, the assassination of Veronica Guerin, and probably a substantial chunk of the Irish property bubble via the laundering of profits and also by the boost to those ol’ animal spirits the drug provides.

Imagine, then, that an important criminal actor supplying the London market with cocaine also had access to a reliable surplus of weapons. There is the potential for trade here.

However, it’s not that simple – the famous Libyan shipment would have fit in a couple of shipping containers, and it kept the IRA going up until peace was signed, with a fair bit left over to be buried in concrete by the international commissioners on decommissioning. It is very unlikely that any plausible flow of arms to Northern Ireland would have paid for the flow of cocaine into the South-East.

We Don’t Need Your Money, Money, Money, We Just Wanna Make The World Dance…

There’s something else going on – Diego Gambetta would have already pointed out that you need to understand the trade in protection. To sell protection, you need weapons, which are the capital equipment of the business of private protection. In so far as the buyers in the UK were paying in guns as well as cash, they were arguably expressing a protector-protectee relationship. While on our territory, we protect you, and license you to provide protection. This was also reciprocated. In accepting them, were the sellers of the cocaine undertaking to protect it in transit on their own territory?

Another way of looking at this, which Gambetta would also approve of, would be in terms of costly signalling. Being both a supplier and a protector is a powerful position, but it might be worth letting the other side have it as a guarantee or hostage, to signal that you didn’t intend to break the agreement and deal with some other supplier. This makes even more sense given that you still have a regular supply of guns you could cut off or use against them, and therefore both parties have something to lose.

Now, Gambetta’s work mostly deals with Sicily, where a very important protection supplier has often been irrelevant. London is a very different society from this point of view. Whatever you think of the police, you can’t just ignore them as a factor. In some other societies, the police might be protection consumers, but here, police corruption usually takes the form of policemen selling protection. (In a sense, the more effective the police, the more tempting this will be. Nothing sells like the good stuff.)

So, gazing down on this complex, neo-medieval exchange of cash, credit, and protection, there is a sort of Sun King whose permission is required for any protection contract to be signed. It’s like a feudal society. My liege lord is only so, because he is the King’s subject, and the King at least theoretically owes duties to the Emperor, or later, directly to God. Our buyer is in a position to offer protection for his end of the business because he enjoys protection supplied by the police.

Who were the recipients, the sellers? They might have been drug dealers who needed to buy protection from one or other paramilitary group. They might have been drug dealers who wanted to build up enough arms that they could stop buying protection, or rather, change protector. Or they might have been paramilitaries who sold protection to the drugs trade. The distinction is surprisingly unimportant.

So, to put the pieces together, there was some group of South-East London villains importing cocaine from transit providers in Ireland, who were also exporting weapons in the opposite direction as part of an exchange of protection for their common business. This required buying protection from the police. Where did the weapons come from? And why is News International involved?

After the last post, I think it’s worth nothing that it’s not just an isolated lapse. The Guardian has recently been sucking up to the Treasury in a revolting fashion. Yesterday’s paper, in an astonishingly hagiographic profile by Nicholas Watt explained how clever George Osborne is in defining his “fiscal mandate” as being to get rid of the current (i.e. ex-capital investment), structural (i.e. what he says it is) deficit over a five-year forecast horizon, on a “rolling” basis so there is no specific date by which it must be judged.

Well-informed readers will remember that inter-war British governments did this with defence plans – the decision was taken that there would be no war for 10 years and this assumption was used as a basis for policy. But the 10 years was considered on a rolling basis, so every passing year extended it further until it was abandoned in 1933, with the result that the British armed forces were just about ready…had the war waited until 1943.

Now you might recall that Gordon Brown also had a set of fiscal rules, and those laid down that the current (i.e. ex-capital investment) budget ought to be in balance averaged over the economic cycle. Put it like that, and you might think that there isn’t really that much difference. And we used to hear a great deal from Tories – and even from well-known newspapers dedicated to Liberal principles – about how the judgment of when the current economic cycle began gave the chancellor too much latitude to fudge the numbers. We heard a great deal about this from George Osborne personally.

But now he’s apparently thinking of tactfully leaving a bunch of stuff (current, structural) out of the figures to make them add up. And he’s quietly letting the day when they have to add up slide right. Fudging the issue, if you like. Just like Crazy Gordon McKiltie Borrowpants. (Did we mention he’s Scottish?)

So why is this a secret? Why did the Guardian publish all the information you need to know this, but not say it? Why do I have to read the papers as if I were composing an exegesis of the Talmud or decrypting the VENONA cables? Is it possibly something to do with this quote from Nicholas “You Fucking” Watt’s profile:


Even his critics acknowledge that Osborne is tough, which will serve him well, as one said. “George has an incredible strength. Perhaps this is down to the way he made it into the Bullingdon and survived. They were a bit sniffy about George. The Bullingdon is basically for Etonians. But they let him in even though he went to St Paul’s, though they did insist on him reverting to his original name of Gideon.

Now that’s what I call the sort of experience that builds real character. This is the Guardian! The Guardian!

Why has the Guardian gone so soft on George Osborne? Today’s paper is a fine example of the art of journalism as practiced to obscure rather than reveal. On the front page, we have this story headlined: George Osborne exploits fall in borrowing costs to boost growth

Now, that’s pretty much precisely what the chancellor would want on the front page, so it’s suspect in itself. But you might think there was another major UK economy story about. Something about the OECD estimating that we’re back in recession? Or you might even have heard another, something about the Treasury/OBR expecting much lower economic growth? Or that the OBR thinks things are so bad the deficit will rise despite the cuts? Strangely, none of these were considered worthy of front page treatment and were shoved back down the ticket to pages 6 and 2 respectively. Page 2 is of course the classic newspaper graveyard – people flip open the rag and immediately see Page 3, which is why what is on Page 3 is on Page 3 if you see what I mean.

The first number that appears on the front page is the figure of £21.5bn, which is apparently “lower borrowing costs” because gilt rates have fallen since last June. It’s not said anywhere how much this is relative to the total bill for debt service (£44bn), or to the government budget (£696bn), so it’s impossible for the reader to know if it’s a lot of money. It’s also completely mysterious whether this is annual, over a parliament, over a Comprehensive Spending Review planning cycle, or what. It is not said, but it is strongly implied, that this money is available now and will be used as an economic stimulus.

But the Chancellor isn’t doing that, and if it is a 5-year figure, the money isn’t available now. We only find out what’s going on over the page, buried on page 2, where we find out without much surprise that it is indeed a figure for the next 5 years, so 80% of it is promises, and anyway the annual figure of £5.3bn is 0.76% of government spending.

The piece moves on to recite a list of eye-catching initiatives – £380 million (woo, isn’t it a lot? Or a little?) by 2014-5 (does that mean rising to £380 million annually by 2015, or £380 million divided by five? They’re not saying, I’d take the short) for childcare (aww, babies), a “£300 million package of tax breaks for small businesses”, “a seed investment enterprise scheme” with no price tag, and – I am not making this up – £50 million for the Caledonian Sleeper.

I mean, it’s very cool and all – I took it in July 2005 to get out of town after terrorweek – but it’s hardly something that belongs in a front page economics story, is it? It’s an utterly trivial and vacuous eye-catching sunday-fer-monday initiative with a canny bit of marginal seat fan service in there too.

So, about that £300 million. Sounds like a lot of money! (After all, we have nothing to compare it with. Again.) You have to read on to page 7 and a story by an actual business desk reporter to find out that £210 million of it is a rates holiday for some small businesses that was sort-of going to end next October, that’s now going to end six months – six whole months! – later. To put it another way, it’s not new money and it’s a trivial amount and it doesn’t happen for a year yet.

Let’s adjust the £300 million – that’s more like £90 million, and we’re getting into Caledonian Sleeper levels of insignificance here. Experienced observers will guess that the unpriced “seed investment scheme” is probably included in the £90 million, thus getting twice the propaganda for the money, and they’d be right. Again, you’ve got to turn to page 7 for this, but not being the New York Times or the Craven Herald & Pioneer, there’s no way of telling that you need to. Government sources apparently think it’s worth £50 million. That leaves us with £40m to account for, and page 7 tells us that £50m is coming for “co-investment” from the “regional growth fund”. Well, the £10m difference can be accounted for by journos trying to add up. But it’s worth pointing out that the £1.5bn regional growth fund has been re-announced so many times you wouldn’t count on there being anything left in it.

And obviously, this doesn’t add up to anything like £21.5bn or even £5.3bn of stimulus.

So what’s going on here? It’s not as if the OECD or OBR stories weren’t running before the Guardian went to press. They’re right there in the paper! But by the time you read them, you’ll already have had your expectations anchors set by the front page, so you’re going to think things aren’t so bad. This is of course why the Treasury briefers gave the story to Nicholas Watt, Larry Elliott and Severin Carrell – to inject their own spin ahead of the news. In fact, Elliott is probably innocent, as he wrote both the real news stories, and the other two just quoted some of his work (chunks are identical).

Why Watt or Carrell, or the Guardian editor they answer to, still don’t either understand this or don’t mind is the real question.

Also, you’d have to read down to the bottom of Elliott’s piece on page 7 to learn that the Bank of England is apparently refusing to carry out the government’s policy even when it only involves the government’s money, rather than the central bank’s, and Osborne has cracked and given in.

The measures will augment the £20bn that the chancellor is announcing for so-called “credit easing” — money that will be channelled from existing promises that had been made by the Treasury to the Bank of England to enable Threadneedle Street to buy corporate bonds. The Bank has not purchased many corporate bonds and some of the £50bn of guarantees will now be used, instead, to help banks raise money more cheaply on the markets – and in turn reduce the price of loans to small businesses.
…..
Will Hutton, co-author of a report on how to revive small business lending, said: “As it is structured, this won’t add £1 extra of new credit.” His report, written with academic Ken Peasnell, argues that the government would have been more effective if it had created a vehicle to buy up small business loans from banks, freeing up their balance sheets. Under the government’s scheme, the cost of loans to small businesses should fall by one percentage point, according to Treasury projections, although this may be less if the government does decide to levy a fee for the guarantee.

So, the £20bn – or is it £50bn? – “credit easing” just isn’t going to happen, because the Bank doesn’t want to do it and Osborne is too weak to sack Mervyn King and appoint someone who will, and too proud to resign and leave the job to someone with balls. Instead, the Treasury’s money (i.e. ours) will be used to buy bonds (probably government bonds) off the banks. We’re already doing this with money the Bank prints, which costs nothing, but this exercise is funded by government borrowing, which we have to pay back. Why isn’t this on the front page?

Thinking about the political castration of Ken Clarke and the fact that not even the Treasury in its most R.G. Hawtrey-esque mood seems to be able to stop the expansion of the prison industry, it struck me that the political class’s attitude towards the public service known as justice is fundamentally different to its attitude to all the others, including defence and policing.

Since the mid-1980s and the rise of the New Public Management – possibly an even more pernicious intellectual phenomenon than New Classical economics – it’s been a universal establishment consensus, shared by all parties, that any public service can be improved by giving bits of it a pseudo-budget to spend in a pseudo-market. Playing at shops is the defining pattern language of post-80s public administration. (This chap wrote at the time that the whole thing was remarkably like the 1960s Kosygin reforms in the Soviet Union, and perhaps we can induce him to post it up on his blog!)

For example, the 1990s Tory government wanted “fundholder” GPs to buy hospital services in an NHS internal market. Now they want to do something similar again, but more, faster, and worse. All sorts of local government services were put through a similar process. Central government agencies were ordered to bill each other for services vital to their operations. The Ministry of Defence was ordered to pay the Treasury 6% a year of the value of all its capital assets, such as the Army’s tank park, reserve stocks of ammunition, uniforms, etc. As a result, the MOD sold as many vehicles as possible and had to buy them back expensively through Urgent Operational Requirements when they had to fight a war. Supposedly, some vehicles were sold off after Kosovo, re-bought for Afghanistan in 2001, sold again, re-bought for Iraq in 2003, sold again, and UORd in a panic in 2006.

(Off topic, if you’re either a reporter hunting a story or a dealer in secondhand military vehicles, watch closely what happens to the fleet acquired under UORs for Afghanistan in the next few months.)

But there is one public service where the internal market is unknown. I refer, of course, to criminal justice. For some reason, it is considered to be normal to let magistrates and judges dispense incarceration, one of the most expensive products of the state, as if it were as free as air. The Ministry of Justice is simply asked to predict-and-provide sufficient prisons, like the Department for Transport used to do with motorways. Like motorways, somehow, however hard the bulldozers and cranes are driven, it never seems to be enough, and the prison system operates in a state of permanent overcrowding. Interestingly, the overcrowding seems to prevent the rehabilitative services from working, thus contributing to the re-offending rate, and ensuring both the expansion of the prison industry and the maintenance of permanent overcrowding.

The new public managers bitch endlessly about “producer interests” – they mean minimum-wage hospital cleaners, but somehow never GPs – but you never hear a peep about our bloated and wasteful criminal justice system. In fact, now that we have private jails, this producer interest is vastly more powerful as it has access to the corporate lobbying system and a profit motive.

Clearly, the problem here is that the gatekeepers to the system – the courts – have no incentive to use taxpayers’ money wisely, as they face neither a budget constraint nor competition. There is a rhyme with the fact that a British Army company commander in Afghanistan has a budget for reconstruction of $4,000 a month, which he must account for meticulously to the Civil Secretariat to the Helmand Task Force, but in each section of ten riflemen under his command, at least one of them can spend $100,000 on destruction at any moment, by firing off a Javelin anti-tank missile, every time he goes outside the wire. As once the thing is fired, he no longer needs to tote the fucker any further, you can see that a lot more is spent on Javelin rounds than reconstruction, and indeed the task force was getting through 254 of them a month at one point.

But it’s not a precise match. The military do, indeed, have to worry about their resources, as do the police. Only the courts can dispense public money without limit.

What if we were to give every magistrates’ court a Single Offender Management Budget, out of which it could buy imprisonment, probation, community service, electronic tagging, etc in an internal market? This would make it obvious to the magistrate how much cheaper non-custodial interventions are than jail. It would force them to resist the temptation to jail everybody out of risk-aversion or political pressure. If a court was to start off the year handing down 16-month sentences for stealing a packet of fags, and end up in queer street by Christmas, well, that will teach them to waste taxpayers’ money.

In fact, we could go further. Foundation courts would be able to borrow, if necessary, to tide themselves over to the end of the year, although of course they would have to make efficiency gains next year to repay it. It would be possible for a foundation court to go bankrupt and close. This, of course, will drive up standards. Perhaps we could even introduce an element of choice, letting defendants choose which jurisdiction they are prosecuted in.

I am, of course, joking. But not entirely.

A good post on the notion of “hard Keynesianism” raises some important questions about the recent past of the Labour Party. Hard Keynesianism is the doctrine that, if the government should run a deficit when there’s a negative output-gap and therefore unemployment, it should run a surplus when there’s a positive output-gap and therefore inflation.

It’s trivially true that the government can’t increase its indebtedness as a share of the economy forever, so obviously if you do any fiscal stimulus at all you need to think about a budget consolidation some time in the future. But the hardness in the hard Keynesianism comes from the idea that the average balance of the government budget ought to be zero. That is to say, between recessions the government should always be running a surplus, and it should just unwind that to deliver stimulus.

There are several problems with this idea. First of all, getting to the point of running a semi-permanent budget surplus is an enormous job and we ought to be very sure it’s a good thing before undertaking it, especially as it involves offering everyone whacking tax rises.

Secondly, big private companies or nationalised industries don’t usually target zero net debt just for the sake of it. After all, if you can get a return on investment higher than the cost of capital, i.e. the interest rate you pay, you ought to raise the capital and invest it. In so far as this doesn’t happen, running the public sector as a structural saver might cost us all in terms of economic growth. It’s not obvious that major infrastructure projects should wait until a recession comes along and gives us an excuse to build.

Thirdly, a permanently reducing supply of government bonds might have unforeseeable consequences in the financial sector. Pension funds are big buyers of government debt because it’s considered relatively safe and it’s available in different maturities, so they can match the flow of income from it to the expected flow of pensions. If it was in short supply, they’d have to pay much more for it, and as a result, pension rates would be worse. Banks park their spare cash in government securities. The Bank of England trades them in order to manage the interest rate. We don’t really know what would happen here.

But finance could react to a shortage of AAA-rated bonds in a couple of ways. One would be to push money into riskier investments. That might in fact help the economy, by getting more money into industry, but you try telling that to people whose savings vanished. Another would be to do what they’re doing now, which is just to sit on their cash and do nothing, so we have a demand-deficient recession. A third would be to do what they did a couple of years ago, and invent new AAA assets. And look how that turned out!

And fourthly, we’d have to think hard about what to do with the surplus money. We couldn’t risk it, and it would have to be liquid so as to be available in a crisis. Obviously, foreign government bonds…you see where I’m going here.

Now, as far as I can see, the main attraction of hard Keynesianism in Britain is either that it sounds easy to sell because it uses the rhetoric of tough-osity, or else that it’s something to throw at Gordon Brown. After all, there is little point complaining about surging public spending in the mid-2000s – because public spending didn’t actually surge in the mid-2000s – or that we can’t plan on expanding the public sector as a percentage of GDP – because it wasn’t historically big or fast-growing in the mid-2000s.

So if your aim is to support the Blairite king-over-the-water, and you’re not willing to simply pretend that there was a public spending blowout in 2005-2006, you need an alternative and hard Keynesianism is it. Oddly, if you take into account some of my objections, you end up with something rather like Gordon Brown’s fiscal rules.





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