Change we can believe in

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It has been posed here before, but the question remains – why aren’t the Conservatives doing better? One fundamental issue, in my opinion, is that the Conservatives have confused style with substance. Let me explain…

In the wake of the 2005 election, the Conservatives came to a realization. All the polling data showed that their policies were very popular, until they were attached to the Conservatives. Then they became unpopular. Essentially, the Conservative brand was toxic.

So David Cameron was elected leader with a mission to ‘decontaminate’ the brand. This involved posing with huskies, denouncing chocolate oranges and swapping the ‘torch of liberty’ logo for an oak tree drawn by a toddler. It also involved talking more about the quality of life and social justice, and less about the economy.

All of which was fine, to begin with. But at some point marketing started to determine policy positions. The point of decontaminating the brand, surely, was so the Conservatives could ‘sell’ smaller government to the electorate. But instead, the Conservatives decided to announce their unilateral economic disarmament, pledging to match Gordon Brown’s (profligate) spending plans. And unfortunately for them, they did this shortly before economic policy once again became the big issue.

To this day, the fundamental confusion remains, even among Conservative MPs and candidates. Are they in favour of a smaller state, or not? Are they going to reverse Gordon Brown’s tax increases, or aren’t they? Are they going to stop the government borrowing £20m per hour, 24/7, or are they going to carry on and hope the problem goes away?

Ultimately, this is why the slogan “vote for change" is uninspiring. Voters don’t know if there’s going to be any change at all. And if there is going to be change, voters don’t know what sort of change it is going to be.

Perhaps David Cameron should just take a leaf from Adam Smith’s book, and promise to deliver ‘peace, easy taxes, and a tolerable administration of justice’. To borrow a phrase, that would be change we can believe in.

Should we have State owned banks?

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National Investment Banks, State owned banks directing investment to politically important ends: yes, we do see people arguing for this in the UK at present. Their argument is simple: banks failed thus government must do it. They are thus, as ever, making the illogical leap from market failure to the assumption that government will succeed.

That isn't what the World Bank appears to believe on the same point:

Research is seldom conclusive, but in the area of state ownership of banking the evidence is as overwhelming as it gets. When it comes to lending, it appears that the state banks are the best at lending to cronies.  Government officials face conflicts of interest that go against efficient allocation of resources – such as securing their political bases and rewarding supporters.  Overall, greater state ownership of banking is associated with less financial sector development, lower growth, lower productivity and even less stability

We can make the same point in slightly earthier tones. Given the choice between investment allocation being done by some random collection of chinless wonders in The City or by Lord Mandelson or, Lord forbid, Ed Balls, my money's on the chinless wonders. At least they're attempting to make a profit while the others are after votes in the short term, not profit in the long. And no, Gideon and his chums wouldn't be any better at it either: it isn't which politicians doing the investing, it's a problem with having politicians doing the investing.

It's entirely true that markets are not perfect: but for real gargantuan failure you need government.

Freedom, fundamentalism and Johann Hari

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In The Independent, Johann Hari sets out what he thinks a Tory win would "really mean". The first half is an uninteresting and unsubstantiated attack on bankers and the money that they give to the Conservative Party, while the second half is a bigoted attack on those he condemns as "religious fundamentalists".

The" religious fundamentalists" he is referring to are parents who want to set up their own schools. But it is not parents, disaffected by the sclerotic state system and wishing to find a haven for their children amid government failure, who are the real fundamentalists. It is the likes of Johann Hari himself. The kind of fundamentalism that Hari proffers is a political fundamentalism that denies the private sphere in toto. It is the mark totalitarianism in its denial of the freedom to choose and the resulting differences.

If imitation is the best form of flattery, I'll go one better and quote Mario Rizzo at length on this issue:

The market is the pre-eminent pluralistic institution. It enables Muslim, Christian, Jew, Hindu, Buddhist and Atheist to live in harmony with each other because each individual in these groups can engage in voluntary trades with willing partners. We cannot, however, trade with everyone at once. Specialization and cost-efficiencies mean that sometimes people will have to go elsewhere to get what they want.

Even more fundamentally, private property involves the right of private individuals to make decisions about resource use. And since some uses are incompatible with others, private property must imply the right to exclude. We cannot provide everything to everyone at every location at every moment.

I couldn't have said it better myself.

PCS strike

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I was accused of trying to shoot fish in a barrel when I proposed a blog on the Public and Commercial Services (PCS) Union’s ballot for strike action by civil servants on Thursday. However, there is something more universal that is bugging me about it.

Mark Serwotka, the PCS General Secretary, argued that their members should be spared the ‘cynical attempt to cut jobs on the cheap’, because the union had proposed cuts and savings in other sectors.

As I mentioned in my blog post on the Unite and British Airways battle, this is a common tactic for trade unions. However it is not exclusively theirs. President Obama also did this in the earlier stages of the healthcare debate. He argued that Obamacare wouldn’t be as expensive as his critics said it would be, because savings could be made by reducing inefficiency in Medicare and Medicaid.

My problem with this sort of analysis is this: Why should the government’s duty to taxpayers to cut spending be ransomed against plans for more spending? Why cant they just cut all unnecessary costs as and when they identify them?

The solution is to both make the savings as the PCS Union identified them (if they actually are real savings) and then also cut the jobs and payouts of bureaucrats who do very little for the country’s productivity. I can see no earthly reason why we should be limited to one or the other.

Re-Evaluate, Re-Evaluate, Re-Evaluate

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Tony Blair's 1997 election slogan was Education, Education, Education. Cameron's should be Re-Evaluate, Re-Evaluate, Re-Evaluate. There are just too many government programmes that have expanded, and lobbied for their own further expansion, and are now costing us a fortune while producing very little that we really need. The statue book is cluttered with regulations that either haven't worked, can't be understood, or contradict each other. It really is time to re-evaluate every single thing that government does, and whittle out the parts we really don't need all that much.

One expert at that is William D Eggers, Director of Deloitte's Public Leadership Institute. His new book, If we can put a man on the moon, examines 75 major government initiatives across several countries, trying to discover what makes them succeed or fail. Most governments, he concludes, do a really bad job of evaluating and re-evaluating their initiatives. Too often, politicians design things that seem fine to them politically, but which become a bureaucratic nightmare at the implementation stage. A bit of forward planning would save a lot of tears. And there is a tendency for governments to try to do everything themselves, on a grand scale – the NHS IT fiasco is an example – instead of simply buying the skills or IT from the cloud of non-government providers that are out there.

Eggars feels that sunset laws are a good way to force everyone into a re-evaluation of programmes and agencies, provided that those who are doing the sunset re-evaluation are genuinely independent, not involved in the implementation process themselves, and insulated from the blandishments of lobbyists. Making public data genuinely public – posting government cheques online, for example, so that everyone can see what is being spent in their name – is another important step. That, indeed, could bring forward a multitude of people who could show that they were able to provide the same or better service in another way and at lower cost. It's amazing that nobody thought of it before.

Defence procurement – A dismal record

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Torpedoes – don’t mention them to MOD Procurement. Like so many other defence projects, the history of torpedo procurement has been an embarrassing litany of massive cost and time overruns.

This sorry record was analysed recently by the incisive Gray Report, which put forward a raft of recommendations for improvement. Indeed, this Report concluded that the average cost overrun for major projects was an astonishing 40%, whilst the average time overrun amounted to a staggering five years. With the next government inevitably seeking cost savings, MOD Procurement will be a prime target, especially since many major projects are currently overrunning.

Within the aircraft purchasing programme, the Typhoon F2 multi-role fighter has been desperately expensive, with future off-take orders likely to be pared back: the F-35 Joint Combat Aircraft (JCA) order book may suffer similarly. The Airbus-derived A400M troop transporter programme is still facing serious financing problems, as has been acknowledged recently by EADS. And the Future Strategic Tanker Aircraft project is also experiencing formidable cost pressures.

Naval procurement programmes have fared little better. The six Type 45 destroyers have faced lengthy delays. The first of the six, HMS Daring – HMS Despairing if you are an MOD accountant – was two years late and £1.5 billion over cost. As for the Army, the £16 billion Future Rapids Effects System (FRES) programme has hardly been free from pronounced cost increases and delays.

The next Government – irrespective of its political hue – needs to get a firm grip on MOD Procurement. Implementing the key recommendations of the Gray Report would be a sensible starting-point. And Ministers need to be ruthlessly focussed when placing large orders, especially those relating to EU-wide defence projects where financial discipline is notably lacking.

Of course, MPs seeking defence-related jobs, ever-changing specifications and technical advances do make matters very complicated. Even so, is this record anything but dismal?

Why aren’t the Conservatives doing better?

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The latest poll (by YouGov for The Sun) has the Conservatives just 6 points ahead of Labour, with 38 percent compared with 32 percent. The Lib Dems are on 17 percent. Assuming a uniform national swing, that would leave the Tories 34 seats short of a majority.

The first thing to say about this is that we're almost certainly not going to see a uniform national swing at the election. The Tories have have been focusing their resources on the marginal seats that are going to decide the election, and polling suggests that they are doing better in these seats than they are nationally. That means they are likely to win more seats than pundits are currently predicting.

Nevertheless, there remains an interesting question here – why aren't the Tories doing better? The economy has gone down the pan. Gordon Brown couldn't be more unpopular. And Labour has been in for 13 years, meaning the political pendulum is almost certainly swinging against them (all governments run out of steam in the end). On this basis, the Tories should be polling comfortably above 40 percent, and maybe even pushing 50 percent.

The reason they're not, in my opinion, is because it remains more-or-less impossible to answer the question, 'what are the Tories going to do for me?' I follow politics closely, and I've really got no idea. So why should they expect the man on the Clapham Omnibus to bother voting for them?

If he wants to win big, David Cameron needs to find a more convincing 'retail pitch', and fast. I know Britain's precarious fiscal position leaves little room for manoeuvre, but at the very least he should promise that there will be no tax rises, no new taxes, and that any tax hikes already scheduled for 2010 and 2011 will be cancelled.

I also think that there is a rich vein of public sentiment to be exploited by railing against all the incremental infringements of our liberty that we have suffered over the last decade – promising to get rid of all the bureaucratic little Hitlers that make British lives a misery would surely be a vote winner. In 1951, Winston Churchill campaigned under the slogan "set the people free". If the Conservatives want to reverse their decline in the polls, they desperately need to capture that same sentiment.

What Bernanke's trying to do is really very, very interesting

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I know, I know, central banking never scores all that highly on the excitement meter. However, what Ben Bernanke's trying to do over in the US is indeed fascinating. The discount rate (the rate at which the Fed will lend to banks) has risen but it's not expected to have much effect on market interest rates.

The increase widens the spread between the Federal funds and the discount rate to half a percentage point, the upshot of which will be to encourage banks to borrow from the short-term credit markets rather than using the Fed – until this decision the cheapest source of short-term funding.

A little explanation perhaps (I didn't say that all of this about central banking would be interesting). In normal times banks do a great deal of lending to each other on very short term bases. Overnight, 7 day, that sort of thing. Just juggling around the surplus or deficit cash balances they have: the differences between what people have dropped into the bank/taken out of it that day/week. This so called "interbank" market pretty much disappeared in the crisis. It was the disappearance of this that led to the worries about ATMs running out of money in 2 hours, the collapse of the entire banking system thing. If you didn't know whether the bank you were lending to would open its doors tomorrow then you wouldn't lend to it overnight, would you? Credit risk entirely overwhelmed the market in short.

The solution at the time was the same in both countries: banks lend their surpluses to the central bank and borrow to cover their operating deficits from it. The bank removes all of that credit risk. We have functioning short term credit markets again and a functional banking system. Excellent.

What Bernanke is trying to do is wean the banks off that credit guarantee that the Fed is offering and push them back into standard short term credit markets. The surpluses should once again be lent direct, the deficits covered direct.

So far so what? I can hear you saying. But this has a huge implication for that Robin Hood Tax thing. For their aim is to apply a 0.05% tax to all such interbank loans and borrowings. Such a tax is, when the interest to be earned from overnight lending something like 0.002%, obviously going to kill the market entirely. In fact, the tax alone makes overnight lending, when calculated on an annual basis, cost 15% or so. Indeed, for some supporters of the tax this is the very point: to stop banks using such short term markets.

There are two implications of this: if Ben Bernanke is deliberately trying to reopen the interbank and short term credit markets then he's not going to look kindly on a tax which entirely kills those markets. I think we can assume that the Federal Reserve will not support the Robin Hood Tax and thus, as an international idea, it's dead.

The second is that if we've got one of the world's most respected monetary economists (even if he is a central banker) saying that we need and want these markets, perhaps we might want to pay less attention to the likes of the nef, RSPB, The British Dietetic Association, the Chartered Association of Physiotherapy, the Musicans' Union (no, really, they're all signatories) who are not respected monetary economists who say we don't want and need these markets?

An act for liberty

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On Wednesday night the ASI played host to Mikheil Saakashvili, the President of Georgia. In his speech, Saakashvili explained how Georgia went from an economic basket-case crippled by corruption to the World Bank's 'Number One Reformer': through a programme of privatization, deregulation and tackling the black economy, Georgia shot up from 112th to 11th in the ease of doing business index in just a few years. However, the main function of the evening was for the President to outline plans for one of the most sensible pieces of legislation enacted since the United States' Constitution: The Liberty Act. This seeks to constitutionally enshrine the economic reforms pursued since the Rose revolution, by imposing a strict cap on the remit and size of any future government. Under the Act, government spending is not permitted to exceed 30% of GDP, while the budget deficit is capped at 3% and public debt at 60%. Price controls and state ownership of financial institutions are banned, and no new taxes or increase in tax rates can be imposed without a referendum. The questions from the packed floor covered a wide range of topics, from Georgia's relationship with Russia and the EU, to monetary policy and the firing of bureaucrats (hear, hear!). One question in particular elicited a marvelous response. When asked why he was seeking to bind his successors, the President promptly replied, "I don't trust any government, including my own". British politicians, please take note!

Burning down the house

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We like to do things back to front down here in Australia. The Australian Government has successfully taken Bastiat's broken window and applied it in reverse. As part of their stimulus response to the GFC, the Rudd government initiated a billion dollar program to provide millions of Australian homes with government-subsidized ceiling insulation. The massive influx of easy money has ballooned an industry that pre-stimulus numbered only a few hundred employees to one that now contains over 7000 employees and operators.

Despite being warned over 15 times by various other government agencies and industry groups that this plan would result in untrained workers and dodgy operators, and that poorly installed insulation would pose serious safety risks, the minister responsible went ahead with the plan. Since then numerous houses have burned down due to insulation being installed over light fittings, and 4 deaths have occurred due to untrained workers putting staples through live electric wires. The opposition is calling for the minister's resignation, and there is now a new industry being created in going back through all the affected houses, trying to find the expected 1000 homes that have been turned into potential death traps.

So although Bastiat proved breaking windows won't stimulate the economy, we Aussies have proved that stimulating the economy might just cause your house to burn down.