Labour’s aim to save £35bn

According to John Redwood, the Labour Government has plans to save £35bn a year. I posted the following comment.

 

 It is good news that the government is allowing for value for money as a consideration. But after twelve years of government, it is a bit late.

 A bit of quick beancounting might put this into perpective. If these are mostly savings they could have made earlier, and assuming they have always been a constant percentage of government spend, then labour’s delay has cost the  taxpayer around £325bn. If it has only built up since the spending hikes in 2001, the figure reduces to £150bn. However, for the government to admit this lower figure would be to admit that a large part of the spending increase was money down the drain.

 Another way of looking at the £35bn is to divide by the number of Labour MPs. It is nearly £100m per MP. As I have blogged before, this level makes the financial amounts of MPs expenses seem trivial.

 But even this annual £35bn only scratches the surface between the best value that can be theoretically achieved and the situation now. There is a lack of dynamism in government in changing service provision to the changing requirements; a lack of expertise in matching real individual (or local) needs to the money available; and a total lack of thought in relating costs to benefits for new initiatives. Add to the mix the strong interest groups in protecting the status quo, and many statutory encumbrances that add little value but a lot of grief, and you have the opportunity to spend a lot less, whilst improving the welfare of society as a whole.

 

To enlarge on why the scope for savings is much larger

 

1)      Much of the government services provided, whether education, health care or welfare payments are based upon a uniform specification. In education, there might be too much spent on some pupils, so that a very small minority will be missed out. The same goes for disability or housing benefit.

2)      Initiatives that flounder. Whether it is the drug addiction schemes that are less than 5% effective or the computer schemes that deliver many times over budget, years late and without the benefits specified.

3)      Lack of marginal analysis. A new initiative will look at the supposed benefits, but not the costs. For instance raising taxes on alcohol, tobacco and fuel may all have the desired results of reducing consumption, but the biggest impact is the reduction in living standards of those whose spend increases on these items. Last year I wrote extensively on the proposed congestion charge in Manchester. My major objection was the same issue. A low charge will be mostly absorbed by the motorists. Only a high charge will cause the majority to switch to public transport.

4)      Ignoring unintended consequences. The smoking ban in public places has triggered a massive decline in the number of pubs. The raiding of pension funds by Gordon Brown has contributed to the decline in final salary schemes. Avoiding recessions after the dot.com bubble burst in 2000 and after 9/11 mean that the boom was prolonged, causing greater grief when the boom finally ended. Doing “whatever it takes” to save the banking system, meant that the exchequer took on hundreds of billions liabilities that may result in massively increasing the National Debt.

5)      Ideological or political appearances. Whether it is “bobbies on the beat” or investing in renewables to meet climate change targets, costs are incurred for public relations, rather than to have any obvious effect. The excessive increases to doctors and nurses in recent years has added billions to the NHS wage bill.

6)      Lack of Expertise in cost negotiation. The government this month signed a £6.5bn PFI deal to widen 38 miles of the M25. In 2004 it was to be £4.6bn for 63 miles.

 

Another attempt at understanding cost control in government was here, where I applied the principals used in my weekly shopping to the issue.

John Major on the need to tackle the UK Government Deficit.

Former Prime Minister, Sir John Major, today laid out, in simple language, the scale of the problem with the nation’s finances in BBC interview

I may change the order somewhat but this is a summary of what he said.

– The scale of the government deficit is unprecendented in Sir John’s lifetime.

– If it is not tackled there will be a severe crisis when our national credit rating collapses, leading to a sterling collapse, leading to soaring interest rates.

Why are we in such a mess? Sir John Major blames it on the government running a deficit in the good times, so the total debt increased when it should have been reducing.

There are 3 ways that will bring the current £180bn  deficit down.

1. Increase Taxes – but even a 5% increase in the basic rate of income tax and 20% VAT rate will do very little.

2. Cut expenditure.

3. Economic Growth

It is expenditure cuts that Sir John advocates

UPDATE 7th July – Adam Smith Institute blog has an alternative report of Sir John’s Comments.

Relying on accurate weather forecasts & Fumbling the Statistics

Tim Harford has an interesting blog on weather and the accuracy of forecasts. However, he does not look at two aspects.

1. The Consequence of Reliance

Harford comments

“A recent case in point: Bournemouth’s woes during the bank holiday at the end of May. The Met Office predicted storms, but the beach resort in fact enjoyed the sunniest day of the year. Bournemouth’s tourist office reckons the town missed out on at least 25,000 visitors and more than £1m of revenue as a result. Subtler losses and gains were registered by the would-be tourists, and the lucky ones who enjoyed both a sunny day and a quieter beach.”

Imagine if this had been the USA. Would the BBC have received class-action suits unless every 2 minute weather forecast had the sub-titled with long sentances about only being an opinion, and no responsibility held for the accuracy. Would they also become increasingly like prophesies from the Delphic Oracle?

2. The Statistical Interpretation.

Harford says

MIT economist Michael Greenstone has studied the impact of local temperature surges on deaths in both India and the US. He calculates that a year with one extra “heatwave” day – temperatures above 32°C instead of 12°C-15°C – would raise the annual death rate by eight per million in the US. In India, the temperature vulnerability is more than five times higher, notably in rural areas where agriculture suffers and wages drop.

The population of the USA is around 320 million. So an extra day of heatwave will cause 2.5% of the population to drop dead.

In India the 5 times higher vulnerability means that one-eighth of the population could be wiped out. Or is could mean that the death rate is only one third higher, allowing for the population is 4 nearly times that of the US.

Maybe the USA figure should be 8,000 and not 8,000,000. It is a shame someone cannot sense check these figures, as Harford has some interesting insights on his blog at the FT.

Socialist Economics

 

Tim Worstall has a blog today on the socialist calculation problem. Here he concentrates on the impossibility of collating the data necessary for inputting into computers. This is the only a part of the problem.

 

1. The Relevancy Problem

Mises said (in Human Action). “Knowledge is about the past, decision is about the future” Past information can only be a guide to future decisions. But if any actor acts differently then past information becomes imperfect, unless the changes follow regular patterns – move along known demand and supply curves in economics language. If there is a structural change, then that past information becomes outdated.

 Example – the credit crunch

A major feature concerning the credit crunch is that we have “entered uncharted territory”. That is, the previous macroeconomic models approximations of the economy are incorrect. The relationships that economists have spent years refining are now irrelevant. This is why the government is going to get things wrong in tackling the credit crunch. There is no past data to model, so they are just guessing. Even if they chose the best policies (unencumbered by ideology or political spin), choosing the optimal combination of quantity, time and place is impossible. However, solving for the macroeconomy is much simpler that the millions of products making up the microeconomy.

 

2. The Disequilibrium Problem

To solve the price problem mathematically is to find the solution to the simultaneous equations.

 P = -x1D+a1

P = x2S+a2

 Where P = Price, D = Demand quantity, S = Supply Quantity, x1 = Elasticity of demand, x2 = Elasticity of supply.

 In the real world, the market is rarely in equilibrium. There are so many things changing that a best you can only characterize the “solutions” as transitory and approximate. At worst, they may be a long out. These equations are for each of many millions of products available, and have to be all solved to produce a general equilibrium. If individual calculations are out, then the relative quantities will be out, having a knock-on effect to all other products. If the relative prices are out in one period, then the information for the next recalculation will be out.

 3. The Philosophy of Socialism

 But even with these problems sorted out, socialism is about equality and “fairness”. In other words, the price of labour is not market determined, nor the price of many items – e.g. healthcare, education, food etc. No Socialist Government is going to suppress the democratic will of the masses, to that a dictatorship of a computer. The “socialist solution” means suppressing the very values in which socialists believe.

 Example – Social housing

A socialist system might hold that people should be allocated housing on the basis of need, rather than ability to pay. So a single person would get much smaller accommodation than a large family. If the rent was controlled or housing was free at the point of consumption, people would want to trade housing. A retired couple, whose children had left home may want to trade for a smaller property in a more desirable area. Someone may be willing to pay more rent for a property near to friends, or to their work, or for a something more desirable (with a garden, near to the country, near to the train station etc.). A socialist may want to override these signals with other aims.

 

History teaching fails on the basic facts – and Daily Mail on statistics

The Daily Mail reports a survey of first year unversity students, which found that as a result of “trendy” teaching, most could not answer basic factual questions on British History. Just 16.5% could name who was was the general in charge of the army at Waterloo, and just 11.5% could name a 19th century Prime Minister. (What of the ignorance of the 5% or more who couldn’t recognise the answer to the first is also a possible answer to the second)

I was of the first to get away from the traditional way of starting with the Romans in First Year and finishing with the Post war events in the fifth form. But I could have answered these questions reasonably well by eleven.

A summary comment on this may reveal a lack of fluency with statistics at the Dail Mail offices

“In total the students answered just 26.7% of the questions correctly – just over one in five”

Hat tip to Conservative Home for directing me to this article.

Giving the BNP voters a message of hope

Summary

BNP supporters include many hardworking, but unappreciated people. Their lives can be turned around by a confident Christianity that values them.

 

 The Political Establishment reviles the BNP, either describing them as beyond the pale, or denigrating them for views they do not necessarily hold. In so doing they guarantee that the BNP will build a core following that will endure. Instead we should understand the people who voted for the BNP. The recent Channel4-commisssioned Yougov survey of electors highlighted the issues.

 

  1. BNP voter families are poorer than national median, but less than 10% below. Indeed, if you allow for the concentration is the lower income areas (Burnley for instance), they are about average.
  2. They are disproportionately manual workers (36% v 20% in the population), male (61% v 48%), and read the most down-market papers (33% v 20%). There are few professionals (11% v 36%) and few readers of the quality papers (6% v >12%)
  3. They feel left out by society. “Just 19 per cent of BNP voters are “confident that my family will have the opportunities to prosper in the years ahead”. This compares with 59 per cent of Labour voters, 47 per cent of Lib Dem and Green voters, and 42 per cent of Conservative voters.”
  4. They feel discriminated against as compared with immigrants, such as the feeling that immigrant families can jump the queue in getting a council house (87% v 56%), and feel that white people suffer unfair discrimination (70% v 40%)

 

There is something else that can be inferred from this data. Despite being of near median family income, they display signs of being below the average educational levels (more Sun & Star readers and lots of manual workers). That means there must be something else that characterises these people. I would suggest that they are hardworking people. The sort of people who two or three generations ago who do any job rather than claim dole; who would be horrified if their children had sex before marriage; who would be proud if they could go through their working lives without a day off sick; who would work long hours to afford the luxuries; who would be proud of their council houses and keep their gardens in a better state than a National Trust property. They are the sort of people who a generation ago would have bought their council house, and immediately change the front door to a mahogany-look one with a brass knocker to show their status. The same generation who would have seen the next door house being allocated to a single mum, who having had three children by different fathers, gets more cash and benefits through a few minutes of drunken sex, than they ever could by working 60 hours per week. They are the people who should be proud of what they have achieved, but looking round now say “should I have bothered?” (or something stronger). They resent those who get things easy, and the hectoring state who taxes their pleasures (smoking and drinking). They have been deserted by their natural political party, who, in being multicultural and inclusive has lost its dogmas and its passion. The final straw is when they support a party who seems to answer their concerns, they are treated as outcasts by the political establishment. That same political establishment, who having for years actively encouraged the politicians to gorge themselves at the public trough, now dither in sacking them.

 

Like the worst gangs, the BNP encourages these people to blame this on other groups – on the muslims, the immigrants, the corrupt politicians or the foreign imports – then provide a strong solution. But the solution is to turn inwards, rejecting outsiders, rejecting foreign imports, rejecting customs. It is also to say that by a strong government that they can believe in, they can get the esteem that they lack. But this will not be the answer. Crushing ones opponents never brings peace; harsher punishment does not reduce crime, nor does protecting jobs make us richer, or even reduce unemployment. Like the communists of yesteryear, they believe with the right plan, ruthlessly implemented they can solve all problems.

 

The answer is not to revile such people, but to see them as achievers, who have been lead astray. One hundred years ago, they would have been the people who packed the churches during the revival, cheered loudly on the terraces on Saturday afternoon, sung lustlily on a Sunday morning and repaired to the club afterwards. The churches again need to accommodate them. To provide them with strong dogmatic statements, not tortuous arguements about gender-inclusiveness and sexual orientation. To provide them with a strong sense of faith, that believes its past achievements and what it can achieve, not a faith that is no better than any other. The BNP followers, I would suggest, are made up of people who have been lead astray, but are not fundamentally evil. They are sinners whose lives can be fundamentally changed by a confident faith.

 

 

Channel 4 commissioned a massive poll of 32,000 electors, of whom nearly 1,000 voted BNP in the Euro election on 4th June. This is the website analysis.

 First, who voted BNP? They were mainly men: they voted divided 61 per cent male, 39 per cent female. (Men comprise just 48 per cent in the electorate as a whole.)

 They were also more working-class. In the country at large, professional workers outnumber manual workers by 20 per cent to 18 per cent. Among BNP voters the pattern is very different: 36 per cent manual workers, 11 per cent professionals.

 One third of them read the Sun or Daily Star as against one in five adults generally; just 6 per cent of BNP voters read the upmarket papers (Times, Telegraph, Guardian etc), which is less than half the national average.

 Yet the household income of the typical BNP voter (£27,000 a year) is only slightly below the national median (£29,000) – and not that far below that of a typical Conservative voter (£33,000).

 It is not money that marks BNP voters apart as much as their insecurity. Just 19 per cent of BNP voters are “confident that my family will have the opportunities to prosper in the years ahead”. This compares with 59 per cent of Labour voters, 47 per cent of Lib Dem and Green voters, and 42 per cent of Conservative voters.

 Among UKIP voters the figure is also fairly low, at 28 per cent, which suggests that UKIP also picked up the votes of many who feel the traditional parties let them down – and not just on Europe.

 Not surprisingly, BNP voters regard immigration as the top issue facing Britain. Fully 87 per cent of them told us it was one of their top three or four concerns. (This compares with a still-high 49 per cent among the public as a whole.)

 But when people are shown the same list and asked which three or four issues “are the most important facing you and your family”, the figure falls to 58 per cent. True, this is three times the national average of 20 per cent, yet it means that for almost half of BNP voters, immigration is NOT among the worries of day-to-day life.

 We also find that most BNP voters do NOT subscribe to what might be described as “normal racist views”. Just 44 per cent agreed with the party in rejecting the view that non-white citizens are just as British as white citizens.

 Yet the feeling is widespread that white Britons get a raw deal. Seventy seven per cent of BNP voters think white people suffer unfair discrimination these days. But that is also the views of 40 per cent of the public as a whole.

 The average British voter is more likely to think that discrimination afflicts white people than Muslim or non-white people. And only seven per cent of the public think white people benefit from unfair advantages, while more than one in three think Muslim and non-white people receive unfair help.

 Thus the BNP is tapping into some very widely held views, such as the desire to stop all immigration, and the belief that local councils “normally allow immigrant families to jump the queue in allocating council homes” (87 per cent of BNP voters think this, but so does 56 per cent of the public as a whole).

 Yet, depending on how the term “racist” is precisely defined, our survey suggests that the label applies to only around a half of BNP voters. On their own, these votes would not have been enough to give the BNP either of the seats they won last night.

 There are two telling pieces of evidence that suggest wider causes of disenchantment. Seven out of 10 BNP voters (and almost as many Green and Ukip voters) think that “there is no real difference these between Britain’s three main parties”.

 But perhaps the most startling finding came when we tested anecdotal reports that many BNP voters were old Labour sympathisers who felt that the party no longer speaks up for them. It turns out to be true. As many as 59 per cent of BNP voters think that Labour “used to care about the concerns of people like me but doesn’t nowadays”.

 What is more worrying for Labour is that this sentiment is shared by millions of voters, way beyond the ranks of BNP voters. Overall, 63 per cent of the British public think Labour used to care about their concerns – and only 19 per cent think it does today.

 In contrast, just 29 per cent think the Conservatives used to care about their concerns; this figure has climbed to 37 per cent who think they care in the Cameron era.

 Yes, Labour has a problem with voters deserting the party for the BNP. But its far bigger problem as it heads towards the next general election is to extinguish the overwhelming public view, reinforced by the scandal over MPs’ allowances, that today’s Labour Party is no longer on the side of ordinary voters. And that, more than anything else, is why its vote collapsed to just 16 per cent in the Euro election.

MPs Expenses – Classic British Fudge follow-up

In an earlier post I wrote about Nadine Dorries alleging that the  “expenses system was designed to give MPs an underhand pay rise, when a real one would have caused public anger.”

John Prescott says that

“I recall Bob Mellish, our Chief Whip in the mid 70s, telling us at the PLP that the Government was not allowing the MPs wage award but the new alllowances would be more generous and they’d allow a ‘liberal interpretation.’

 This led to my first row with Bob about this policy, which I told him would end in tears”

BNP’s Economic Policy from a 16 year old

I thought I would look into the BNP’s policies to see if they have any depth. On the BNP Chronicle (a blog that slavishly follows the party line, but is not the official mouthpiece of the BNP) is and article on “Why the BNP can get us out of the Recession” by Jason Newton Aged 16. In the light of his being a minor, I will try to inform than put down.

 

The errors are as follows

 

  1. The solution is less exports and imports.

 

“The solution it seems would be to reduce foreign imports and reliance on them. This would not only reduce who would be involved in this mess but also make it more manageable since by the use of Occam’s razor we can deduce that if less countries are reliant on each other the less that can go wrong.”

 

This is incorrect. The Great Depression of the 1930’s was made much worse by the Smoot-Hawley Tariff Act of 1932, where the US Government sought to protect it’s own industries. Other countries retaliated. Industries that faced foreign competition were helped. They could raise prices and increase output. But, when other countries retaliated, the exporting industries suffered. So jobs are gained in some areas, but lost in others. But with less competition, profits are higher. This is fine for the minority, but not for the majority who pay for the profits with higher prices and less choice.

 

  1. Recessions are caused by an excess of Aggregate Demand

 

“A recession is a temporary retraction in the economy. This means that a recession happens when the current aggregate demand of the economy is greater than the total output.”

 

An excess of aggregate demand is a boom that is out of control. In Keynesian theory (to which I do not subscribe) this leads to inflation. John Maynard Keynes wrote that you could get stuck into a depression by a deficiency of aggregate demand – a circular situation where people without jobs have no money to spend, but without people spending no jobs would be created. The current crisis is due to the financial system seizing up. It was caused by two factors. First, a policy in the United States of helping the poor those in high risk jobs to get mortgages (the sub-prime). Second is keeping interest rates too low for too long (they were lowered after the dot.com bubble burst, and again after 9/11, then raised too high in 2005 and 2006). It was like encouraging some teetotalers to drink a beer. Then when they start feeling a little dizzy to have another and turn the music up. The world economy has collectively passed out. They are each waiting their turn for the stomach pump.

 

2. The way out of recession is through investment.

 

Spending more money would increase aggregate demand which is too high in the first place, if it weren’t we wouldn’t be in a recession. We need to cut back on spending and increase investment that, way more goods and services will be produced, and the long-run equilibrium will be at a higher point.”

 

Investment will help recovery out of the recession, but it must be of the right type. The sort of investment that produces real returns, not job creation schemes that will lead to higher taxes forever. The problem is, government expenditure is already out of control. The cut-backs in spending required will depress aggregate demand far more than some investment will increase it.

 

3. There is only a finite level of output.

 

“With this in mind it shows how the bnp will help to create a stable economy and won’t be driven by the ideology that an economy will continue to grow. The world isn’t big enough for us all!”

 

British economic output in total (after adjusting for inflation) is over 2,000 times higher than in 1700. Per person it is 250 times higher. In purchasing power it is 40 times higher than in the poorest countries. Globally in the last millennium, output per person grew by 20 to 30 times (2000% to 3000%). Most of this was in the twentieth century. But in 1900 or 1950, most people would have said the economy can’t grow any more. Further, an economy that does not grow will be an incredibly miserable place to be, Spain from 1940 to 1975, or Portugal 1945 to 1970. The biggest example is India from 1947 to 1990. They shut off the economy to foreign goods & foreign investment. Instead, they sought to control investment and business with a licencing system. The system was corrupt with the political elite prospering, whilst the vast majority were kept poor.

 

Jason. I sincerely hope that you go on to study economics seriously. But do not be fooled by the fancy graphs (or algebra at higher levels). They are but abstractions that can aid understanding, but also provide blinkers to that knowledge.. The real economy consists of billions of people, who by mechanisms that we do not fully understand, in serving their own immediate purposes, also serve the common good. A source of Britain’s Greatness was being the first country who let the market mechanism flourish.

Climate Change – An opportunity for the UK to benefit humanity

In March, Phillip Salter, on the Adam Smith Institute blog, suggested that we should also open up peer reviews in climatology.  My response was

 

Dr Alister McFarquhar is right in that the opening up of peer reviews will not help.
There are is a way that the closed world of the Climate Change Lobby can be changed. Steve McIntyre of climateaudit.org campaigns for the datasets behind articles to be published. In Economic Theory this already happens, which means that debate is actively encouraged. That is careers are made more through disputing established opinion than reinforcing that opinion. Such an approach should appeal to those on both sides of the debate. Those who believe in anthropogenic global warming should be in favour of optimal policies, so must want to see challanged the more eccentric views based on poor scholarship. It would also appeal to those are searching for answers, or who believe that proper debate brings greater understanding.

 

I would go further.

 The Government is looking for opportunities for investment to get us out of this depression. That is spending of money now that will lead to far greater returns for the economy in the future. In the area of the universities, this means promoting the UK as a world-leading centre of original research. Financing the launch of a new journal (say “Critical Perspectives on Climatology”) is one area where there is a huge gap in the market. The Government can justify it for the following reasons.

  1. The promotion of better science will give a new lease of life to the historical role of the UK as a fountainhead of great intellects.
  2. Reducing the risks to the poor. Extra measures to combat climate change will hurt the poor the most. For this reason, more objective analysis will reduce the risks that we will get policy wrong.
  3. Proper stewardship of the Earth means proper democratic debate, where all views are heard. This is another reason for Britain’s historical pre-eminence in science.
  4. When funding investment one should look for high returns. Most government-backed investment does not get back the money invested. This one could generate huge returns.

MPs Expenses – Classic British Fudge

There is a very valid allegation that Nadine Dorries makes, that will get drowned out in the backlash from her wilder comments. The expenses system was designed to give MPs an underhand pay rise, when a real one would have caused public anger. Nadine Dorries claims that until 2005, MPs were actively encouraged to view expenses as part of their normal salary, and the fees office actively helped. According to Iain Dale, that same fees office have privately apologized to Labour MP Ben Chapman for advice given to him on his mortgage arrangements. Dale also made a post that Ken Livingstone has alleged that the Labour Whips actively encouraged MPs to see second home allowances a supplement to their salary. They therefore encouraged MPs to claim the maximum.

 

If Dorries’s allegation is true. then the current expenses system was put in to deceive the electorate about with the true level of MPs pay. In so doing it encourages a culture of dishonesty and self-serving that should be alien to the political class. It also shows that rather than a few MPs troughing off their own, both the fees office and the political parties actively encouraged their MPs to participate. This could be most damaging for the Labour party who have done least to make a clean break with past practices.